Executive Compensation Caps

The news of the day is the decision by the Obama administration to put caps on executive pay, at least at the companies that have lined up to received funds from the government. Not surprisingly, there are people with strong views lining up on both sides of the issue. So, I guess I will stick my toe into the water and hope not to get burned (since there is an obvious political component to this debate).

As a general rule, I don't think governments should have any role to play in setting compensation limits. The heavy hand of government intervention will not only create quirks in the labor market but have unintended consequences. For instance, the US government (in its last populist phase in the early 1990s) decided that executives were getting too much and decided to restrict the compensation that firms could deduct for tax purposes to $ 1 million (per executive)... Since compensation was defined in the legislation as pay and bonuses, and did not include options, it played a role in triggering the huge option packages that executives have received in the last two decades.

But here is why I am torn. The proposed executive pay cap is toothless for most companies and will have an impact only at those firms that have used the federal government as a piggy bank (Citi and BofA ). If we accept the proposition that there is no free lunch, these firms asked taxpayers for capital, were provided this capital and are in no position to deny taxpayers a say in how they make decisions or compensate employees. (As taxpayers, we are singularly unfortunate that we are represented in this process by legislators who have the attention spans of infants and the time horizons of riverboat gamblers...) Faustian bargains have a way of coming back to haunt you.... You lie down with dogs, you wake up with fleas!! (No more analogies, I promise!!!!)

I must close by noting that I think executive compensation is way out of hand at many companies but I think that just as voters in a democracy get the government that they deserve, stockholders are getting the treatment that they too deserve. If we want compensation to be reasonable, and by reasonable, I am not ruling out very large compensation for managers who truly deserve it (Steve Jobs at Apple should be given a few hundred million), we should not be looking to the government for solutions but to ourselves. Investors, and especially institutional investors, need to work to put in place rules that give them more say in compensation. I also like the British notion of putting top management compensation agreements up for stockholder approval routinely.