The irrationality of corporate governance

As I mentioned, the Goldman Sachs bonuses ($10 billion in federal bail-out money, $10 billion in year-end bonuses) are a symptom of a deeper problem:

Gene Expression: CEO pay, part II
If you read my previous post on CEO salary cap, check out Jim Manzi’s thoughts. Also, Felix Salmon and Megan Barnett debate the pay cap (he is in favor, she against). After Salmon presented his case I’m inclined to be less charitable to Barnett than I was before. But this post by Bob Sutton seals the deal:

The results still amaze me: After controlling for traditional size and performance measures, the amount of money made outside directors, especially those on the compensation committee, had a huge effect on CEO pay. O’Reilly and his colleagues report that for every $100,000 that the average member of the compensation committee is paid, the CEO’s pay goes up another $51,000 per year. Remember, these effects are independent of firm performance and size!
There are two lessons here. The first, as is well-documented, that there is little relationship between what CEOs get paid and firm performance, other — less rational — factors overwhelm it….

It is a documented social science finding that the more intelligent tend to hue more closely to the ideal of H. economicus. But just because smarter people are more rational does not mean that they are very rational (humans being a very irrational beast). Here’s another nugget about CEOs you probably know about:

What legal solution should we have if shareholders as a class are unable to care for their own interests in a company?

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