Obama just placed a $500,000 compensation limit for executives at companies receiving government bailout funds. Unfortunately, a number of highly visible firms have not spent their government goodies wisely, thereby inviting this scrutiny. It’s difficult to argue with Obama at the surface level. If the federal government is going to bail out a firm, then it seems reasonable that executive pay should be limited until such time that the firm no longer needs federal assistance. The problem is that the federal government should have never given funds to these companies in the first place.
As I have written earlier, we are now sliding down the preverbal slippery slope. When the government bestows any financial benefit on a firm, it has the right—and arguably the responsibility—to concern itself with how the money is spent. The end result is a government that “demands accountability” and ultimately directs corporate affairs. This means that Washington gets to tell firms how much they can pay their executives, what products they should produce “in the public interest,” who they should hire to produce them, and so on.
One should ask 2 important questions here. First, what qualifies politicians to govern the affairs of a firm? Some members of Congress have various levels of business experience, but Washington’s primary interest is not firm profitability. Politicians must deal with special interest groups and voters on the government dole who demand that corporations become less profitable and “give back” more to society. By the way, if you think Washington can run a business effectively and efficiently, just take an honest look at the US Postal Service.
The second question concerns unintended consequences. Will a $500,000 salary enable a firm to attract and retain CEOs most capable of turning around these firms? Consider that most top executives have already amassed a considerable amount of wealth and have a genuine disdain for government manipulation of business (although they can’t afford to say this publicly). It is likely that many of the most capable current and potential CEOs will simply pass on Obama’s offer of $500,000 to work 24 hours a day under stressful circumstances, opting instead to pursue their own business interests with other firms or even retire.
The common response I hear to this argument is that “I’d certainly be willing to run a company for $500,000.” The problem with that argument is that you, like most of us, lack the skills necessary to run a Fortune 500 company. For better or worse, the current crop of Fortune 500 CEOs have paid their dues learning to manage the complex problems faced by modern corporations. Most have worked long hours for years and spend little time with their families. This doesn’t mean that their decisions are always correct. However, history tells us that as a group, they are very good at what they do.
Should the government restrict CEO pay? Absolutely not. Doing so gives rise to a number of practical questions: How much is too much? Which bonuses are acceptable? Who decides? Besides, at a philosophical level, it’s just none of the government’s business. I do favor, however, the idea that has been floating around for some time that shareholders of publicly traded firms be allowed to vote on executive compensation packages. This places accountability where it belongs, in the hands of the firm’s owners.
If you disagree, you have some consolation in the fact that well paid executives pay are heavily taxed. At the federal level, the top 5% of wage earners account for over 50% of the federal income tax revenues. In this respect, the government should be promoting high CEO pay, not restricting it!
Unfortunately, I cannot make as strong an argument against Obama’s decree limiting executive compensation in firms receiving bailout money. It’s worth noting, however, that his speech announcing the limit cast dispersion on executives in general, not just those in firms receiving government funds. You can expect him to continue his demonization of corporate American and call for broader pay restrictions in the future. When he does, I wonder if he will also seek to limit the speaking fees ex-Presidents charge? I doubt it.