Boots And Sabers

Obama Looks to Regulate Executive Compensation

By - Mar 21st, 2009 04:24 pm
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This is not only outrageous, it’s a very bad idea. 

The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.

Increasing oversight of executive pay has been under consideration for some time, but the decision was made in recent days as public fury over bonuses has spilled into the regulatory effort.

The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could range beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation.

Let’s start with the obvious… government regulation of compensation packages is a violation of the property rights of the owners of the companies.  If I want to start Owen’s Corn Dog Emporium and pay my CEO $14 trillion dollars a year, it is no business of the government’s. 

But economically, government control of executive compensation would be disastrous to our economy.  I’m a hardcore capitalist when it comes to compensation.  If a CEO is successful, then pay him or her a fortune.  If a CEO is a failure, then sack him or her and get someone else.  The problem is that terms like “successful” and “failure” and “fair” are highly subjective.  Let’s say that my Corn Dog Emporium is bleeding $10 million a day because it is run inefficiently and it’s a bad economy.  There’s a new diet craze that forbids corn dogs.  I hire a new CEO who manages to cut my daily losses to $2 million.  Is my new CEO successful?  He has certainly helped the company, but it’s still in the red.  The real question is, who gets to decide?  Me, the owner, or the government?  What if my new CEO achieved these results by firing a third of the staff?  Is some grandstanding politician in Washington going to get outraged that he fired people and dictate that I cut my CEO’s compensation? 

This has real world implications.  Let’s move away from my fictional example and into the real world.  Think about the executives at a company like GM.  GM has an unsustainable business model for the 21st century economy, but they are contractually locked into that business model.  What if the CEO did what needs to be done – declare bankruptcy, shed the legacy obligations, and reorganize the company?  This would result in hundreds of thousands of workers and former workers losing their benefits, pensions, etc.  At the same time, that CEO may make $10 million.  Does anyone really think that the politicians in Washington would consider that fair compensation?  Given the feeding frenzy taking place over AIG, I’d be dollars to doughnuts that GM’s CEO would be sitting in Congressional hearings and being told to forfeit his salary even though he did the exact right thing. 

Yes, there are ridiculous compensation packages out there, but inserting politicians into the mix will only make it more absurd.  Leave compensation between the owners and the employees. 

Categories: News & Views, Politics

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