Article

The Hidden Nature of Executive Retirement Pay

There are two competing theories of why public companies pay executives generous retirement benefits. One is that retirement pay is easier to hide from shareholders than other forms of compensation. The other is that retirement benefits align executives’ interests with those of long-term creditors, since the executives may not receive their payouts if the firm goes bankrupt. The latter view depends on the assumption that retirement benefits put executives in a similar contractual position as the company’s creditors. Yet no previous work has tested that assumption.

This Article provides the first systematic study of the contractual structure of executive retirement payouts. Using retirement pay data for thousands of executives, we show that a large proportion of executives link the value of their payouts to the company’s stock price and receive the bulk of these payouts immediately following their departure—features that contradict the incentive-alignment theory of retirement pay. The evidence also shows that the full amount and structure of retirement pay are undisclosed—findings consistent with the camouflage theory. While the structure of some executives’ payouts can be reconciled with the incentive-alignment theory, current rules do not give investors the information they need to tell the difference between payouts that align incentives and those that camouflage compensation. Lawmakers should require companies to reveal the structure of these payouts, and neither regulators nor commentators should assume that retirement benefits suppress top managers’ appetite for risk.

Improving Rights

Courts and commentators regularly assume that a single avenue for rights-making is both sufficient and unproblematic. For example, it is enough if a Fourth Amendment claim may be litigated either in suppression hearings or in civil suits under 42 U.S.C. § 1983. In previous work, I presented original quantitative and qualitative evidence that challenged this assumption, arguing that litigation in a single context tends to flatten and distort constitutional rights.

In this Article, I build on this critique by introducing cognitive psychology research suggesting that judicial rights-making is better undertaken simultaneously in multiple contexts. For example, on this view, Fourth Amendment rights would be better crafted both in suppression hearings and in civil suits under 42 U.S.C. § 1983. Such rights-making is preferable because it exposes judges to a broader range of governmental and private actors, factual circumstances, and social interests. In other words, multiple-context rights-making better captures the full array of considerations relevant to defining the proper contour of the right. Multiple-context rights-making would therefore result in better rights—that is, rights that more closely resemble the rights that judges would construct if they considered all the information relevant to the right itself and only that information, freed from bias, cognitive errors, and the influence of other contextual factors.

With this insight as a foundation, the Article then turns to the question of how to create the conditions necessary to improve constitutional rights-making. While previous commentators have wrongly treated rights-making conditions as inevitable, I explain that the conditions under which rights-making occurs are sensitive to factors well within governmental actors’ control, such as available remedies, incentives to litigate, and procedural hurdles. I conclude that government actors can and should take concrete and affirmative steps to improve the conditions of constitutional rights-making.

Market Efficiency after the Financial Crisis: It’s Still a Matter of Information Costs

Compared to the worldwide financial carnage that followed the Subprime Crisis of 2007–2008, it may seem of small consequence that it is also said to have demonstrated the bankruptcy of an academic financial institution: the Efficient Capital Market Hypothesis (“ECMH”). Two things make this encounter between theory and seemingly inconvenient facts of consequence. First, the ECMH had moved beyond academia, fueling decades of a deregulatory agenda. Second, when economic theory moves from academics to policy, it also enters the realm of politics, and is inevitably refashioned to serve the goals of political argument. This happened starkly with the ECMH. It was subject to its own bubble—as a result of politics, it expanded from a narrow but important academic theory about the informational underpinnings of market prices to a broad ideological preference for market outcomes over even measured regulation. In this Article we examine the Subprime Crisis as a vehicle to return the ECMH to its information cost roots that support a more modest but sensible regulatory policy. In particular, we argue that the ECMH addresses informational efficiency, which is a relative, not an absolute measure. This focus on informational efficiency leads to a more focused understanding of what went wrong in 2007–2008. Yet informational efficiency is related to fundamental efficiency—if all information relevant to determining a security’s fundamental value is publicly available and the mechanisms by which that information comes to be reflected in the security’s market price operate without friction, fundamental and informational efficiency coincide. But where all value-relevant information is not publicly available and/or the mechanisms of market efficiency operate with frictions, the coincidence is an empirical question both as to the information efficiency of prices and their relation to fundamental value.

Properly framing market efficiency focuses our attention on the frictions that drive a wedge between relative efficiency and efficiency under perfect market conditions. So framed, relative efficiency is a diagnostic tool that identifies the information costs and structural barriers that reduce price efficiency which, in turn, provides part of a realistic regulatory strategy. While it will not prevent future crises, improving the mechanisms of market efficiency will make prices more efficient, frictions more transparent, and the influence of politics on public agencies more observable, which may allow us to catch the next problem earlier. Recall that on September 8, 2008, the Congressional Budget Office publicly stated its uncertainty about whether there would be a recession and predicted 1.5 percent growth in 2009. Eight days later, Lehman Brothers had failed, and AIG was being nationalized.

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