Do CEOs Need A Salary Cap?

[Brad Kenney]

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.

[Jon Katz]

Originally Posted by Brad Kenney

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.)

Brad,

I thought I was pretty clear in my post that I was referring to companies receiving billions of dollars in bailout funds and that by reading the full context of my post most readers would gather that.

The key point I was trying to make are the questions some have raised over a "pay cap" and how that could impact the companies they've been charged to resurrect. Accountability is fine, and I don't think anyone is arguing that companies receiving "extraordinary assistance" shouldn't have their spending habits closely monitored. (Others would contend that they shouldn't be receiving assistance in the first place.)

But if you're providing funds to a company with the goal of saving/creating jobs and returning it to profitability, some would posit that you need the best and brightest executives steering the ship and that punishing them with pay caps might not be the best way to achieve this.

--Jon Katz

[dougspair]

...So yes, I keep reading about these big CEO's who complain about how they just can't live on less than 8-10 million $$ a year....
...Myself, a maintenance mechanic....$20 hour....I get by OK on that....and last few months only working 20-24 hours a week....
Just my opinion...Doug

[MichaelBP]

Originally Posted by Brad Kenney

Why do we need to come to the brink of our macroeconomic existence to "re-realize" what should be common sense?

Well, let's look at the situation in courts determining disposition of illegal/unregistered aliens living within our borders: they're as congested as traffic courts in larger metropolitan areas and, due to the volume of cases, individual pleadings are being processed with about as much examination. Theses are hearings that will determine the course of people's lives, but because we've let the problem get so out of hand, the system is being overwhelmed. Judging by this and how similar "macro" situations have arisen in the past, I'd say human beings have a serious problem in exercising collective intelligence in dealing with widespread problems until they've reached critical mass. Ergo the current financial morass.