By: Nathan Lindsey and Maury Noonan*
Following the 2008 financial collapse, American policy makers and the public scrutinized executive compensation. This article examines modern finance theory’s regulation reluctance prior to the collapse and the resulting new regulations under TARP and Dodd-Frank. These changes mark a shift toward broadening theories of consumer confidence beyond mere corporate profitability.
Few issues capture the vigor of the American public’s reaction to the financial crisis of 2008 more than executive compensation. America’s corporate executives are paid huge sums of money. As a result, there has been debate among academics and the popular press about the impact of executive compensation on the economy leading up to the financial collapse. Discussion centers on determining how much compensation is excessive and how such excessive compensation should be managed as America attempts its recovery.
The Increasing Amount of Executive Compensation
The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was passed, at least in part, as a response to sentiments that the old system of incentivizing executives to boost short-term profits through reckless management strategies should give way to rewarding more long term, sustainable growth. At a basic level, these new regulations were billed as a means of increasing investor confidence in the market. Modern finance theory has generally accepted a direct correlation between corporate profitability and investor confidence; however, the recent economic crisis has opened this previously accepted truism to scrutiny.
* Nathan Lindsey is a third-year student at the University of Kansas School of Law completing his Juris Doctor with a certificate in Media, Law, and Technology. Maury Noonan is a third-year student at the University of Kansas School of Law completing his Juris Doctor with a certificate in Environmental Law and Natural Resources.