Wednesday, February 4, 2009

Not precisely communism, but certainly not encouraging...

... is the apparently forthcoming Obama administration edict that corporate heads who take government bail-out money will have their annual salaries capped at $500,000.

First, a note for truth in advertising purposes: I have always said that when you take the government's dime, you allow the government to call the shots. These companies have no inherent right to my tax dollars, or even to stay in business.

That having been said, here's why this is terribly dangerous, this appeal to what could only be characterized as progressive populism:

1) You pretty much get what you pay for. Senior government officials don't make these salaries, but they have multiple incentives to forego them (temporarily) while they "serve": (a) access to power; (b) indirect compensation and benfits such as you and I can only dream about; and (c) the tremendous post-government salary, lobbying, and consultancy multiplier. Within the ranks of senior corporate executives there is tremendous abuse, granted, but somebody like Bank of America's Kenneth Lewis ($24.8 million plus bonuses last year) doesn't ever have to work again if he doesn't want to do so, and the competent people you need to turn around some of these corporations are not going to be enticed by an annual salary of less than a back-up NFL linebacker on special teams or a country music warm-up act. Sort of makes you wonder where John Galt is, anyway.

2) This policy represents little more than a gigantic bait-and-switch. While calling for corporate accountability and damning the private sector for redecorating their bathrooms or purchasing private jets, our government leaders exist in a bubble that is not one whit less comfy and posh--all at taxpayer expense. Take a look at the Senate dining room, as I did last June:

The Senate dining room is a public eatery, where even the wait staff averages $37,000/year, the food is terrible, and taxpayers have had to fork out subsidies of $18 million since 2003 just so Senator Bob Menendez (D-NJ) could continue to eat sushi that costs you and me more than an Amtrak ticket.


Likewise, let's recall that while struggling to save Social Security, all your Senators, Congresscritters, and senior Federal employees benefit from a taxpayer-funded retirement plan that will pay people like Chris Dodd and Barney Frank hundreds of thousands of dollars per year on retiring. Social security? Make that hundreds of dollars per month. And as for the idea that I've heard recently floated that the President's $400,000 salary should be some sort of measuring device, let's just say we'll talk about it when somebody gets around to placing a monetary figure on his taxpayer-provided living quarters, transportation, and vacation expenses.

3) This is only intended as a first step. Because virtually every corporation receives some sort of government funding (research grants, tax breaks, etc.), pretty much just like every university does, this precedent will ultimately allow the government the power to cap the pay of anybody in the corporate world, not just those whose businesses are in trouble.

4) If extending this beyond the current crop of CEOs were not the point, there are other ways the administration could have accomplished the same goal without asserting this power. Just tell Bank of America it can pay its CEO whatever it wants, but that between $500,000-2,000,000 all corporate salaries will acquire a dollar-for-dollar reduction in available TARP funds; above $2,000,000 the reduction will be $5 per dollar. If Kenneth Lewis is still worth $24.8 million, that's fine: BoA can hand back $120 million in TARP funds. But the administration is unlikely to take that route, because President Obama senses public support for getting the government into the business of determining how much people can make....

5) It's going to make for one interesting press conference when some reporter finally asks the inexperienced Press Secretary if the government plans to cap the salaries commanded by Alec Baldwin, George Clooney, or Kobe Bryant.

6) It's cosmetic: if we assume that Bank of America took its $1.8 billion loss last year because of Kenneth Lewis' poor stewardship (a fact not in evidence), and if we attribute his entire salary against that loss, then the corporate loss would still have been 98.65% as high if his salary had been capped at half a million bucks. What this cap idea has to do with is not economic justice, but diverting attention from the ethical and tax problems of multiple administration appointees.

7) It's going to be challenged in court (if you were making $24 million a year, to save it would you worry about looking unpopular for fighting?) by somebody, and it's probably going to be proven unconstitutional. But even if not, it will take years to litigate, during which time nobody will suggest capping the pay for the trial lawyers, because they are big-time Democratic donors....

In short, this is politics, not policy. Hell, it's not even ideology.

7 comments:

Bowly said...

Re: #2--Don't be ridiculous, Obama will have a Chief Performance Officer!

bint alshamsa said...

I think #4 is a brilliant idea and one that I wish they'd use.

Shirley Vandever said...

This type of executive compensation and bonus packages has been going on forever...it was only when everyone's 401-K took a dump that we started noticing.

I like #4 as well...Otherwise, hello John Galt.

Of course, John Galt would never have asked to be bailed out.

Delaware Watch said...

"If extending this beyond the current crop of CEOs were not the point, there are other ways the administration could have accomplished the same goal without asserting this power. Just tell Bank of America it can pay its CEO whatever it wants, but that between $500,000-2,000,000 all corporate salaries will acquire a dollar-for-dollar reduction in available TARP funds; above $2,000,000 the reduction will be $5 per dollar. If Kenneth Lewis is still worth $24.8 million, that's fine: BoA can hand back $120 million in TARP funds. But the administration is unlikely to take that route, because President Obama senses public support for getting the government into the business of determining how much people can make...."

You need to rethink this one because, the reduction notwithstanding, the high compensation will still be paid by tax dollar funds, which is precisely what is objectionable.

I'm actually surprised that you are defending the rich CEOs here. After all, all that the govt is offering is a CONTRACTUAL arrangement, one that the banks can enter into freely or not (I thought you Libertarians had a hard on for contracts): "take our money and cap your pay...that's the deal." Why is that bad? The banks don't have to take the money if they want to continue to lavish their top CEOs.

As to your hypocrisy argument (the Senate dining room), it's fallacious. One bad practice doesn't justify another.

Also, your slippery slope argument (fallacy) seems hysterical. This is a plot to cap pay elsewhere in the economy--please! As long as their is big corp money going to elections and PACs, it will never happen.

Shirley Vandever said...

There is actually one good thing that good come out of this ...

If the companies don't agree to the conditions, they won't take the money. They will have to weigh the value of their keeping their executives against the value of getting bailout funds.

It might change some minds, and that would be a good thing.

Steve Newton said...

Dana,

Vis a vis me and contracts, didn't you see this paragraph:

First, a note for truth in advertising purposes: I have always said that when you take the government's dime, you allow the government to call the shots. These companies have no inherent right to my tax dollars, or even to stay in business.

I meant it.

Bowly said...

You need to rethink this one because, the reduction notwithstanding, the high compensation will still be paid by tax dollar funds, which is precisely what is objectionable.

But the fact that the pay is objectionable is still populist nonsense. As Steve pointed out in #1, given the capped salary, it's far more profitable to take a government job, or a lobbyist job, or just stay home. There's a strong possibility that you're not going to get the kind of CEO you need.

I assure you that the bailout became objectionable long before executive pay became an issue. Now the issue is how to not waste the money that's already been confiscated. High executive pay is not automatically a waste, although it certainly may be in some cases.