Free Markets, Free People


Executive Pay Capped

Many progressives thought that Pres. Obama had abandoned them after the election, but I’ll bet they’re singing a different tune today:

President Barack Obama on Wednesday imposed a $500,000 cap on senior executive pay for the most distressed financial institutions receiving taxpayer bailout money and promised new steps to end a system of “executives being rewarded for failure.”

[...]

The limit would apply to top-paid executives at the most distressed financial institutions that are negotiating bailout agreements with the federal government.

Obama in Scold Finger III - From Stalinist Russia With Love

Obama in Scold Finger III - From Stalinist Russia With Love

It also would apply to other banks that receive aid, but they could get around the limits by publicizing to shareholders plans to exceed the salary cap.

The “most distressed financial institutions” will not include those which have already received TARP funds, such as AIG and Citigroup. However, those firms are already subject to caps on executive pay under the statute authorizing the bailout last Fall. And because these companies have all come to the government “with hat in hand,” in Obama’s words, not too many people outside of Wall Street are upset. Yet, Obama does not seem content to stop with these “distressed” companies:

The administration also will propose long-term compensation restrictions even for companies that don’t receive government assistance, Obama said.

Those proposals include:

• Requiring top executives at financial institutions to hold stock for several years before they can cash out.

• Requiring nonbinding “say on pay” resolutions — that is, giving shareholders more say on executive compensation.

• A Treasury-sponsored conference on a long-term overhaul of executive compensation.

This is exactly the sort of creeping socialism that many of us were worried about with Obama’s election. Mind you, McCain would not have been much better, but this sort of heavy handed government interventionism would not have been proposed by his administration, much less tolerated by most Republicans in Congress.

Obama’s proposals are somewhat tolerable with respect to the bailed out companies since they are being funded with tax payer dollars. If these companies are going take the money, then they should have to abide by whatever rules are attached to the funding no matter how onerous. But trying to impose such draconian restrictions on companies that are not being bailed out is nothing more than a direct assault on freedom.

Even if you think that no executive should be paid more than $X more than the lowest paid employee of a firm, or are just angry at the seemingly wasteful and lavish life styles of Wall Street bankers, you still have to find this sort of proposed legislation abominable. Why? Because no matter what you think about executive compensation, the owners and operators of these companies think otherwise. It’s their decision to make about how their companies are run and how well their employees are paid. Unless, of course, you would just fine and dandy with some government bureaucrat deciding that you are overpaid for your position, and that no matter how hard you work you can never make more than $Y.

The only people who would ever agree to such slavery are those who have no ambition and little, if anything, to offer the world in terms of work product. They are not the people who invent the items, create the ideas, or provide the services that make our lives better over time. That is not to say that their efforts are not appreciated, nor that they shouldn’t be rewarded. But neither should we base the engine of wealth creation on their hopes and dreams of sinecure.

Beyond the egregious assault on freedom these proposals represent, there is also a huge question as to their efficacy, regardless of whether the firms are troubled or not (my emphasis):

Compensation experts in the private sector have warned that intrusions into the internal decisions of financial institutions could discourage participation in the rescue program and slow down the financial sector’s recovery. They also argue that it could set a precedent for government regulation that undermines performance-based pay.

“One of the big questions is whether it will make it more difficult to recruit and retain executives at these companies,” said Claudia Allen, chair of corporate governance at the Chicago-based law firm of Neal, Gerber & Eisenberg.

The $500,000 cap “is a very tight limit,” she said.

Timothy J. Bartl, vice president and general counsel for the Center On Executive Compensation, said the president’s actions are a unique situation given the government’s role bailing out troubled institutions.

“We do not view it as something that ought to be extended beyond this circumstance,” he said.

I don’t think there’s any legitimate doubt that these will be the effects. Indeed, here are some of the reactions to Obama’s proposals:

Goldman Sachs said yesterday it wants to repay $10 billion it got from Treasury under the TARP to signal the firm is healthy and to escape limitations that came with that infusion of money. “Our financial condition is sound and, subject to approval from regulators, we hope to repay TARP money as soon as practicable,” said Lucas van Praag, a spokesman for New York- based Goldman Sachs.

JPMorgan CEO Jamie Dimon said Feb. 3 that the firm didn’t need capital and didn’t ask for TARP funding. The lender accepted the $25 billion it received from the first capital injection at the request of the government and to help stabilize the banking system, he said.

Goldman has to get permission to repay the government? Does that make sense? Only if the reason the funds were distributed in the first place was to give the federal government control over the market place. I think that’s exactly what Bush (“I’ve abandoned free-market principles to save the free-market system”) and Paulsen had in mind with TARP, and I think Obama is prepared to carry the ball even further into socialist territory.

As far as retaining talented executives, why would any of them stay? If you were making $10 Million per year including your bonuses (not uncommon), why would you stay somewhere that’s forcing you take a 95% pay cut? Of course, many will say good riddance to bad rubbish, and perhaps their right. It’s not like a firm that goes crawling for a federal handout was performing all that well. Except that (a) it’s far from clear that bad management led to the current crisis (although, surely that had something to do with it), and (b) even if it were clear, not every executive or potential executive was responsible. If you are a rising star in your investment bank who has put in exhaustingly long hours to get ahead in hopes of a big payday in the future, why would you stick around where you know your options are limited? These are very smart, industrious and capable people. There are plenty of places where they can go and not be subject to such pay strictures, and that is where they will end up.

Moreover, a part of the proposed regulations practically eliminates the fabled “golden parachutes” for executives:

Obama said that massive severance packages for executives who leave failing firms are also going to be eliminated. “We’re taking the air out of golden parachutes,” he said.

This displays a fundamental misunderstanding of what golden parachutes are. Contrary to popular belief, they are not generous giveaways to failed executives, but instead incentives for failed executives to get out of the way and allow new management. Without these sorts of incentives, management becomes entrenched and complacent. If a proposed takeover threatens to take away the goodies they can vote themselves, then they will forego such proposals and keep cashing in. In order to align management’s interests with the shareholders, golden parachutes were introduced to incentivize firm managers to sacrifice their jobs when the best interests of the company warrant it. Since one of the major problems that everyone seems to have with Wall Street is the failure of effective management, one would think the new rules would make it easier to bring in new blood, not harder.

But none of that matters to Obama:

Mr. Obama said the cap strikes the right “balance” between fair compensation and proper stewardship of taxpayer funds. “This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success. And we believe that success should be rewarded. But what gets people upset –and rightfully so–are executives being rewarded for failure, especially when those rewards are subsidized by U. S. taxpayers.

“For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste, it’s a bad strategy — and I will not tolerate it as President.”

Again, it’s hard to generate much sympathy for executives who’ve come begging to Washington. But at the same time, what point is there to heavy handed measures that don’t do anything more than satisfy some people’s jealousy and outrage? Shouldn’t these proposals be designed to put people back to work?

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15 Responses to Executive Pay Capped

  • <blockquote>The administration also will propose long-term compensation restrictions even for companies that don’t receive government assistance, Obama said.</blockquote>

    Oh, I have a great idea!  Let’s also limit the pay of Hollywood performers.  Oprah, Tom Cruise, all that gang: none of them will be allowed to earn more than $500,000 a year.  The cost of movies will go down, and enable more poor people to see them…..
     

  • Sports, too.  I might be able to take my family to a game again!

  • While we’re on the topic of limiting the compensation of people being paid on my taxpayer dime, Mr. President …

  • Class war?  Pah……been going on all along.  Before it was the taxes on these rich b@stards people, now we want to make sure it extends to their salaries too. This is class warfare writ large and bold. Fair is for me, but not for thee, of course.

  • Not that I disagree with the post, but it’s a hard sell right now.  The pay of American executives keeps going up and up, yet the companies they run keep biting the dust.  People wonder why some fat cat in the corner office deserves millions in pay and bonuses while he’s laying off huge chunks of his workforce.

    I think we’re going to have to learn the hard way that capitalism, while hardly “fair”, beats the hell out of the other options.

  • Another thought: I wonder if this is going to bite into the corporate campaign contributions the filthy dems get?  Or if CEO’s will continue to pay danegeld to the dems (spit) to keep them from enacting even worse regulations?

  • I have no sympathy fr the incompetent management of these companies that got the bailout funds, but we all know they didn’t get there alone.  The federal government, with all its rules and regulations (e.g. CRA) helped them get to this point.  Still, the executive pay cap, plus other anti-exec rules, is a horrible mistake.  I would say the Law of Unintended Consequences will rear its ugly head, but I can’t help but wonder if Obama and crew know of the consequences and just don’t care.

  • The administration also will propose long-term compensation restrictions even for companies that don’t receive government assistance, Obama said.

    There is no way in hell that would pass review by the Supreme Court…

  • Obama’s got a sweet compensation package….so does congress.

    I know where we can target next…

  • The National Football League and possibly other major sports leagues receive governmental economic assistance through Federal anti-trust waivers. This allows them to engage in monopolistic practices, which have a significant impact on increasing ticket and product merchandising revenues. Given this direct Federal financial support, we’re clearly justified in imposing a similar cap of $500K/year on all players, management and other involved sports personalities (e.g. TV broadcasters). Additionally, many of the broadcasters receive Federal airwave transmission authorization through FCC spectrum grants. We need to limit all in the main-stream media, entertainment industry and management.

    It won’t be long before the U.S. economy is killed. Obama even warned of that possibility today, allowing him to blame the straw man when it does occur.

  • HatlessHessian said:
    “It won’t be long before the U.S. economy is killed. Obama even warned of that possibility today, allowing him to blame the straw man when it does occur.”

    I thought that was Obambi’s target all along.

  • “It won’t be long before the U.S. economy is killed. Obama even warned of that possibility today, allowing him to blame Bush when it does occur.”

    —fixed to reflect the reality of his craven nature

  • What about authors, especially those who took “government” experience and then made money off that? Obama, Clinton, etc. They should be limited to US$ 500,000 for all book deals.

  • For some reason I always thought that stockholders had some say in takeover bids. Maybe because, as a stockholder, I have received a couple of ballots in the mail to vote for or against a merger/takeover. Silly me.

    As for golden parachutes being an incentive for failed management to leave, that seems a bit silly. Once again, as a stockholder I have been given an opportunity to vote on elections of directors, management compensation, and other such issues. Never have I heard of paying lousy managers to leave. Whatever happened to firing lousy managers?

    • Stockholders don’t get a say unless the Board votes to accept a takeover proposal.  Golden Parachutes kick in when managers are forced out through a change in control or ownership.  The reasoning is that the managers won’t be incentivized to fight their removal, but instead, will have their interests aligned with the shareholders.  In addition, GP’s can discourage hostile takeovers (used like “poison pills” and the like).

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