Barney Frank on Executive Compensation and the Financial Crisis

What could convince Frank that pay reform isn't necessary?

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People are starting to realize that while the story of lavish bankers' pay as one of the main root causes of the financial crisis might make sense, there is not much evidence to back it up. Jeffrey Friedman deftly explains how empirical studies of bank compensation have revealed that those banks where the CEOs had more of their own money invested in the success of the bank didn't perform better than those where the link was more tenous.

So this Times story looks at the debate (but strangely doesn't mention the Ohio State study Friedman discusses.)  Here's how proponents of the theory are responding to the critics:

Professor Bebchuk, via e-mail, said he and Professor Spamann had not tried in their study to assess the evidence presented in the Stulz-Fahlenbrach study. But even if one accepted that evidence at face value, he added, it wouldn’t mean that bankers’ incentives were inconsequential.

Representative Barney Frank, the Massachusetts Democrat and chairman of the House Financial Services Committee, concurs. Mr. Frank, whose committee is considering pay reform legislation, said in an interview that it is entirely possible that in something as complex as the credit crisis, any one factor taken in isolation can seem insignificant even when it plays a large role.

That argument from Congressman Frank is entirely reasonable. Yes, it is impossible to fully prove the negative that CEO pay played no role. But it seems to me that's not where the burden of proof lies. It's on Frank to show the evidence of this "large role" before pay reform legislation happens. But if the CEOs who had the incentives most out of whack didn't perform noticeably worse, which seems to be the case so far, then maybe Congress (and the G-20) should focus their efforts on some of the other suspected root causes.