Obama and his chief tax collector, Tim Geithner, are planning to cap executive compensation at $500,000 at financial firms bailed out by the government. Some observations:
- Owners set the rules. Essentially the government has become shareholders in these firms, and has as much right as any other shareholder to set the parameters of executive compensation. For everyone who cheers this cap, remember that this rule also applies when private citizens own the firms. If shareholders, through a board of directors, decides that it’s worth paying an executive $100,000,000, it’s no more objectionable in principle than the government flexing its shareholder muscle and deciding executives are worth no more than $500,000.
- Salaries pay for talent. At some point, we may decide that we need to hire CEOs who can return these firms to profitability. In our current economy, such people are obviously rare and will be in high demand. Salaries will have to rise to match that demand. Think about it from a pro-sports franchise perspective. If the Oakland Raiders ever hope to get back to the Super Bowl, they can’t keep paying the league minimum to rookie quarterbacks and other key players. There are perhaps ten top-quality QBs in the league, and you’ll have to bid against all the other teams to land one yourself. The reason star players are paid the big bucks is because their talent is rare and effective.
- Government will exert control wherever it can. Although some had hoped that the TARP would not mean the government would interfere with the running of the firms it helped, it was as inevitable as a Cabinet secretary not paying his taxes. Even if you’re not a CEO or employed in the financial sector, this example should be instructive. If the government pays, it will insist on making the rules. When the government pays for your medical bills, it will want to cap your calorie intake. When it pays for your children’s health insurance, it will want to limit the size of your family (thanks, Nancy, for your honesty there). I have a lot of respect for the Ford Motor Company who, despite being in a lot of financial stress, declined the offer of federal help. It knows that when you invite the government in, it never leaves.