Archive for February, 2009

Gov't capping CEO Paychecks?

It has been said a dozen times here and elsewhere, that any opportunity the federal government has to reach in and regulate a free market, will be taken and with all due haste.  This is just another example of the type of knee-jerk reactions that we can expect from the over-simplified economic view of our legislators and new President.  Recently, the federal government (President Obama and Congress) have called for legislation to limit the salaries and bonuses of executives in bailed-out banks and Wall Street firms.  They have decided, in their infinite ignorance, to limit the salaries of said executives at $500,000.00, as they consider it unconscionable for these people to make more while they run a company that is in receivership.

I understand the point of view, and I empathize.  It does not seem right that a CEO or other executive be paid millions of dollars salary and millions more in bonuses while they are accepting tax dollars to prop up their companies.  In order to stem the so-called greedy behaviors of such executives, the liberals in Congress and President Obama have called for salary caps.  There in lies the numerous rubs. 

  1. The government should NEVER be imposing wage and salary limitations on private enterprise.  As with every other “power” granted to the government, it will inevitably expand beyond that of companies in receivership.
  2. By setting a salary cap, the government then ensures that the best-of-the-best executives will not take or keep jobs at firms in receivership.  This in turn diminishes the chances that the company will return to profitability (at least in the foreseeable future), and pay back the tax payer money.
  3. By diminishing the entity’s ability to pay back the funds, the government ensures that the company remains in receivership for longer, and thus allows the government to maintain control of the company and in all likelihood expand their control.
  4. Class warfare.

It is extremely important to note that by capping the salaries of executives, the effective potential of the company is limited.  This is because the best and brightest, the “winners”, will not take a pay cut (especially to the tune of millions) in order to return a company to profitability.  This means that either the current, and in several cases worthless, executives will remain in place while the propped up company spirals even farther into the ground.  It also means that many boards will be unable to replace executives with those talented and dedicated enough to return the company to profitability.  They will instead be forced to hire / keep executives that are inferior but willing to accept the pay.  Essentially it’s like telling a NFL team that they cannot draft until the 4th round and they cannot play (or must cut) their starters, and then expecting that team to reach the playoffs.  The government, through compensation limiting, is in fact limiting the return on our dollars.

This is not to say that I believe that these companies should continue the bloated perks or retreats.  It is to say, rather, that the government should not be capping salaries and handicapping private enterprises.  The outrage about many of these CEOs making multi-million dollar salaries and multi-million dollar bonuses is understandable.  I do empathize.  However, sometimes the solution is worse than the problem.  This is one of those times.

UPDATE: Apparently, I am clarevoyant.  It begins.    I hate to say it but – See, I told ya so.

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