MFG 2.0

Do CEOs Need A Salary Cap?

I was just doing my usual lunchtime troll through the IW site and came across my colleague Jon Katz's post (Pay Cap A Hat Many Won't Wear).

A few things are amiss in this argument.

First off, this sentence :

Obama has imposed a new requirement that any company receiving federal aid must cap executive compensation at $500,000 a year.

...is simply wrong. If you read the articles (for instance, this WSJ article) about the initiative, the pay cap is on companies receiving "extraordinary assistance" (think multiple bailouts a la Citi, AIG etc.). There will be new rules on all bailout recipients going forward, but the pay cap only currently applies to those companies that needed specially structured bailout assistance. As well it should. (IMO, these " should all lose their jobs, but I guess there's got to be some limit to where the government treads even while handing out trillions of dollars in federal programs.)

Secondly, do you have any idea of the scope of how many companies now fall under the rubric of a "...company receiving federal aid?" Don't know if you've noticed, but the Fed is now buying commercial paper that the market won't buy (or, to be more accurate, that the market wouldn't buy without a backbreaking risk premium).

And to further elaborate on the pay cap, that's just salary -- anything above/beyond half a million dollars has to be given in the form of restricted stock that can only vest once the company pays back its taxpayer loans. This creates the type of alignment between motivational forces of the taxpayer and the executive that should have been implemented in the first bailout bill, but wasn't.

To someone using the "OMG IT'S SOCIALISM!!1!" argument these are just pesky details, I know, but critical details are what was conveniently left out of the Paulson-led programs. I for one am glad that there is finally some accountability and alignment.

Because, after all, this is the type of attitude we're dealing with (quote from the same WSJ article):

Corporate directors and the consultants who advise them say the government's increasingly tough stance -- which began with more limited restrictions in September's bailout legislation -- is shifting discussions inside boardrooms toward limiting pay at companies untouched by the bailout.

"The context of compensation has changed" as a result of the federal bailout, says Arthur C. Martinez, chairman of the board compensation committees at Liz Claiborne Inc. and PepsiCo Inc. and a former chief executive of Sears, Roebuck & Co. Boards realize they can't "reward behavior that doesn't also reward shareholders," he adds. "That's on everybody's lips right now."

Which begs the obvious question -- why (barring corporate criminal malfeasance) would anyone reward behavior that didn't reward shareholders? Why do we need to come to the brink of our macroeconomic existence to "re-realize" what should be common sense?

It's precisely because we have extremely well-connected (and probably just as well-compensated) corporate leaders saying such stupefyingly obvious things as if it's NEWS that such measures need to be taken.

TAGS: Innovation
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