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Friday, October 23, 2009

The Executive Pay Slippery Slope

Yesterday, the White House pay czar, Ken Feinberg, did his round of interviews to explain the massive cuts in executive pay for bailed out firms.

The Washington pay czar who's ordered steep pay cuts for executives at bailed-out firms could
have practically unlimited power to regulate compensation at any company that gets federal funding, lawyers say -- even if his legal authority is sketchy.

The move raises questions about whether the mandate will be limited to the seven firms Kenneth Feinberg is currently targeting -- and whether it could trickle down to smaller companies.

"He has a lot of authority with respect to not just the seven but with respect to all TARP firms," said Stephen Bainbridge, law professor at UCLA. "It's an enormous expansion of federal power over corporations."

I haven't seen any polling on Feinberg's move but I suspect it would enjoy significant support. Why not? After all, no one likes greedy Wall Street executives. Most people especially don't like greedy Wall Street executives that ran their firms into the ground. If the tax payers bailed them out, we have a right to determine how much money they make.

Neil Cavuto was on O'Reilly's show to offer the minority opinion. Cavuto had two different problems with this. First, by limiting pay, it also limits the talent at these firms. If we're to get our money back, we'll need to have good executives at these companies. Good executives aren't going to come to GM if they know that Ken Feinberg can cut their pay if he feels like it. Second, Cavuto said that this is a very slippery slope. Once these companies have their pay set, where will it stop? O'Reilly acknowledged the first argument had merit but dismissed the second. Was O'Reilly getting ahead of himself?

Yet today, the Fed and Treasury announced a coordinated effort that will put the central bank at the heart of the rush to regulate pay on Wall Street. The regulations, which will try to align the financial incentives of managers with the longer-term performance of their firms, will give the Federal Reserve direct oversight over the pay of tens of thousands of executives, bankers, and traders.

In fact, whether by design or accident, Feinberg's move is only the beginning. The Federal Reserve is ready to be significantly more heavy handed than Feinberg is. Whereas Feinberg limited himself to seven firms that still owe the government, the Fed wants to regulate executive pay of every company they regulate. In other words, the Fed is ready to determine that part of their regulatory authority is the ability to regulate executive pay.

That's how monsters like this can easily start. It starts with an action that has overwhelming support, like Feinberg's action. Then, that action is followed by something just slightly more sweeping and soon, all financial firms have their executive pay regulated.

That's just one of the problems with these bailouts. I don't have a problem with Feinberg's move per se. After all, if the government is going to invest billions, they have a fiduciary responsibility to make sure that the money doesn't go to exorbitant salaries for incompetent executives. The problem with the bailouts is that it forces such relationships. Such relationships are inherently conflicted and counter productive. They create a perverted market and they almost always lead to bigger problems. That appears to be where we are headed.

5 comments:

Anonymous said...

Paul Volker is right, take the anti-trust ax to these banks.

As far as the talent thing? Ozzie Guillen put it best when he said "pssh, please." Traders are a dime a dozen, just like in any other job. Most of the trading is done by algos anyway.

Joe said...

The problem I see with government bureaucrats limiting executive pay is that they will do so arbitrarily. Where is GE's executive pay cut? They received a huge amount of TARP funds and other bailouts (which itself was ridiculous).

Executives with influence in government will not see their pay cut as much as the other execs. Keeping their pay is just another incentive for executives to make deals with the current administration in power. This is a huge incentive for more political corruption.

This is also the same problem with onerous regulation. The feds can arbitrarily target businesses the administration dislikes, and give passes to the ones that play ball with them.

This is just one big step toward bringing Chicago politics to Washington D.C.? How many people will speak out against corruption if those in power can control your salary? Even if they only control your bosses salary, your boss is not going to appreciate any opinion contrary to those who set his wage.

If we are to have control of executive pay and other regulations they must be levied fairly and equally (which the government cannot do in this case). The government should not enact anything that is inherently unfair or unequal. Those in power love vague regulations and powers because they can arbitrarily enforce them against those they don't like. When do we consider ourselves a slave to the government and their arbitrary decrees?

David Leach said...

Not sure if you caught Andrew Napolitano comments on this yesterday. He was pointing out that this was unconstitutional. Sure the public opinion on these folks is not very favorable but it was the congress that rush through a bailout measurement that didn't have any provisions about pay and bonuses. Then they come in after the fact and pass something to target these few individuals.

He felt that these executives, if they had a spine, could file suit.

Further, they are stepping on private contracts... both of which are expressly prevented by the constitution.

http://www.foxnews.com/video/index.html?playerId=011008&streamingFormat=FLASH&referralObject=10903768&referralPlaylistId=c985e69916535a2170b2b18ab0ab7eb60401f9bb

Anonymous said...

You could make the case that acceptance of TARP funds constitutes waiver of their contract rights. Or you could plead constructive bankruptcy, unconscionable contract, or any other kind of equitable relief.

All the Constitution does is uphold the "Obligations of Contracts." But guess what? the courts are the ones who interpret what that is. And they get a lot of their interpretation from English Common Law, which has plenty of room for the government to maneuver.

Anonymous said...

MV --- the economic "dream team" doesn't seem to think incentives are important, otherwise they wouldn't reward failure and punish success.

@Anonymous, 11am: "Traders are a dime a dozen, just like in any other job." Sometimes less. The trouble is the good ones cost a lot more. And unfortunately, HAL9000 has yet to learn how to write algos, so people are still required for those.