Executive pay limits at bailout firms – The blogs react
October 22, 2009Jon Brooks 2 Comments »The Obama administration has announced that seven companies which received government bailout money will need to cut compensation to their highest-paid employees. (The Fed today also announced a pay-review plan designed to cut down on excessive risk-taking. Reaction to that later.)
From the New York Times:
Reactions…
Economics blog Marginal Revolution
There is no way this will work as advertised. If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere. Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut. Chaos will be created at these firms as top people leave in droves. Will the administration then order people back to work?
Law blog The Conglomerate
…to my knowledge, there has never been as aggressive an attempt to manage executive compensation. Some observations…
- …you always know that you’re playing to Congress and the cheap seats when you go after perks: “any executive seeking more than $25,000 in special perks — like country club memberships, private planes, limousines or company issued cars — will have to apply to the government for permission.” There’s probably less than $ 5 million at stake for these perks … but that doesn’t mean that it won’t be fun to tell executives that they can’t go play golf.
- Can these executives or firms sue? The government’s TARP decisions are subject to judicial review: so yes, they can…But I cannot imagine a court parsing individual compensation decisions of the government in these sorts of cases…
Law blog ProfessorBaindridge.com
The Obama administration has shown a shocking disregard for the rule of law when contract rights interfere with the administration’s ability to reorder the American economy as it sees fit…
So set aside the question of whether compensation at financial firms is “too high,” however you propose to measure it. Set aside the question of whether these troubled firms will be able to keep their best people, who presumably now will be targeted by unregulated firms like hedge funds that will be free to pay market rates.
The basic problem is here is that many (most?) of the compensation deals the Obama administration is shredding were set in employment contracts. Granted, some of those employment contracts were signed after the law setting up pay “czar” Kenneth Feinberg’s position and empowering him to review pay packages at TARP firms. But a lot of them are pre-existing contracts and it’s those contracts that are the main concern.
Politics and policy blog Raising Kane
Before we start reveling in the fact that firms like Citigroup and AIG are going to see executive pay regulation…the two firms conspicuously missing from the list of those being watched are going to hand out near-record payouts to their executives a year after they themselves caused the financial mess that has led to rampant un- and underemployment, and a lowering in the average American’s salary. When I called Congressman Barney Frank’s office and began asking questions about Mr. Frank’s willingness to enter legislation to rein in firms that received TARP money but technically paid it back…I was transferred to the House Finance Committee. The nice woman who picked up the phone explained to me that while the House has been working on shareholders’ rights issues and corporate governance…When I asked if she knew if the Committee would be introducing legislation to rein in executive pay at firms like Goldman, she said she did not believe so….
Economics blog Naked Capitalism
…the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.
If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don’t like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments.
Ken Feinberg, the President’s “pay czar” came down hard on executive pay yesterday, for those banks still collecting money under TARP, as well he should. But Feinberg isn’t trying to pass new financial reform legislation, and TARP no longer covers several of the biggest banks with the highest pay and bonuses — although they’re still getting subsidized by the government with low-interest loans.
October 23rd, 2009 at 12:11 am
What has happened to the belief in a free-market capitalist system. These companies are like a sinking ship and the government is telling these all-important executives to bail water with a sieve. Why is it that when politicians get to Washington they think they can part the seas and restore the fortunes of the nation, when this is entirely dependent upon the efforts of hard-working entrepreneurial capitalists in private enterprise.
October 26th, 2009 at 6:51 am
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