The Fatal Conceit in Executive Compensation

From the WSJ: President Obama and his team are trying to move towards a system that pays professionals for the quality of their work:

In business, Mr. Obama and Treasury Secretary Timothy Geithner are trying to redirect calls for imposing salary caps to mandating “pay for performance.” This isn’t foreign to companies: They have long said they intend to peg compensation to numerical results and aren’t insulted by the notion that professionals are motivated by money.

It seems like a good idea. Shouldn’t executives be paid based on how well they do their job? But Obama has made the fatal conceit: He’s assuming that government knows how pay should be set. As Gary Becker said about the Treasury’s “Pay Czar”:

The title of my post, “The Fatal Conceit”, is taken from… Friedrich Hayek. In this book Hayek attacks socialists for “the fatal conceit” that government officials can effectively determine prices and production through various forms of central planning without having the incentives and information available to firms in competitive markets. A closely related conceit is behind the belief that someone sitting in Washington can determine the pay to hundreds of executives and other employees.

Hey Obama, you wanna do pay for performance? Why don’t we start with you and Congress?

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