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Friday, July 31, 2009

Meet the New Executive Human Resources Director: Barney Frank

The House passed the most sweeping regulatory bill on limitations of executive pay today.

The House approved a measure Friday that would put new constraints on executive
, capitalizing on outrage over multimillion-dollar bonuses to Wall Street executives whose firms were bailed out by taxpayers.

The measure, which applies to any firm with more than $1 billion in assets, passed 237 to 185, with most lawmakers voting along party lines. The Senate will not take up a similar measure until after it returns from its August recess in September.

The bill, introduced by Representative Barney Frank, Democrat of Massachusetts, would let regulators ban risky incentive-based pay that could have an adverse effect on the financial system.

This bill would give the Congress all sorts of new power to regulate salaries, bonuses, and other benefits packages (like the hated golden parachutes) of any individual deemed an "executive". The good news is that this bill has a slim to no chance of becoming law. The bad news is that our legislators are so drunk on power that they think that this is part of their job description.

It's important to note that Frank's bill wouldn't merely regulate the executive pay of those companies that have $1 billion and more in assets. There is so much troubling in this bill. First, Frank is trying to use class warfare by attacking a class of people that have little sympathy anywhere, executives. By attacking executives, a class no one likes, the Congress can do something that is entirely not their business.

There is absolutely nothing in the Constitution that could reasonably give Congress the power to tell a private company how much to pay any of their employees, executives included. Yet, that's what Congressman Frank has purported to do and he found 236 other lawmakers that agree with him. There's no doubt that many executives are over paid and often paid handsomely for incompetence. There's also no doubt that fixing this is entirely up to the private market and not the federal government.

The negative unintended consequences are numerous. This will no doubt drive executive talent to foreign firms not under this regulation. American companies will simply not be able to compete in the word market place for executive talent. If you were an executive would you work at a firm in which Barney Frank could dictate how much money you can make, when another firm of equivalent credentials doesn't have the same restrictions?

Of course, once the Congress gets its meathooks into executives that definition will continue to expand. If Congress is given any power to regulate executive pay it's not long before executive are defined to include more and more private employees. Of course, power is like a drug. Give Congress this power and it only feeds their monster and their thirst for more.

This is yet another example of why I see class warfare as such a corrosive tactic. Frank capitalizes on the natural disgust and envy for executives and he uses that to give him and his colleagues power none of the founding fathers intended. He uses this envy to craft legislation that will make firms less competitive, give government even more power, and opens the door to give it even more power. We can all only hope that this dies a fast death in the Senate


Anonymous said...

This reminds me of when Bush passed that overtime reform early in his presidency, where he had more and more people classified as "supervisors" who didn't qualify for overtime pay.

In any case, I think you seriously overestimate:

1. the ability of the market to act as a check on people who effectively write the rules of that market. These guys hire each other to each other's boards.

2. how talented these guys are. As I mentioned in #1, its not talent that keeps these guys in business.

3. how much companies in foreign countries pay their executives. If I recall correctly, exorbitant compensation isn't as big of an issue in any other country. Example: Chrysler Deputy CEO Jim Press. Why would Press leave Toyota, where he was President of the US division, to take a job as a Deputy on the Chry-tanic. Could it possibly be because Toyota doesn't pay as well?

mike volpe said...

That's what we have a stock market for. If a company has a bad policy for choosing executives, then you shouldn't buy stock in it. A company that is corrupt in the manner in which it chooses its executives is one that doesn't perform well. So, you shouldn't invest in it. It's not the job of the government to make executive pay decisions.

There are plenty of executives that are talented. There are tens of thousands of companies and not all are corrupt in who is chosen to be an executive.

I don't know what the executive pay is of foreign firms but government controls on executive pay makes U.S. firms less competitive. There's no question about that. You may be right in that the effect won't be that dramatic but that doesn't mean it won't be an unintended consequence nonetheless.