Should the Government Decide Your Salary?

All The Bloviating Over Exec Pay Is Nothing More Than Government Interference In Private Contracts

(CBS)  Francis Cianfrocca is a Senior Editor of The New Ledger.

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Yes, that's my question. Even though the week's headlines are about how much senior management should be paid, the real underlying questions are: can the government do this effectively, and should they be doing it in the first place? Because even though the pay arrangements of the best-paid people in American business are on the block now, the precedent for government input on salaries will be exceedingly easy to extend to everyone else.

In a publicly-owned corporation, executive compensation (the salary, bonus, perks, and other incentives granted to the most senior managers) is determined by the board of directors. Most boards have an independent compensation committee composed of a subset of the directors, that makes the decisions. CEOs and other senior people always have employment contracts which guarantee their base pay levels, but comp committees generally have some discretion as to the awards given for good performance. In other words, if the management team do a really good job, the board can give them extra. And crucially to the current debate, that's supposed to work the other way around, but rarely does.

But having said that, the arrangement generally works well. The directors are responsible to the common stockholders, and in fact are their representatives. There's no a priori conflict in this relationship, and no fundamental reason for wanting to change it.

The first chink in the argument comes from the White House. Since long before moving to the White House, Obama and his economic advisers have been in favor of allowing common shareholders to vote directly on the pay packages of senior executives. Such votes would be taken at annual-meeting time. Think back to the recent annual meeting of Bank of America in Charlotte, when plenty of shareholders would have gladly voted to string CEO Ken Lewis up, on top of cutting the amount of money they paid him.

But what's the point of this? To give shareholders a chance to vent their frustration? What good does that do? The large institutions that own most of America's public stock (the university endowments, pension funds, insurance companies, hedge funds and mutual funds) are fully free to dump stock in companies with poorly-performing managers. Giving shareholders a chance to nick a CEO's pay envelope is only of use to an investor who's too stupid or too static to just sell his shares and buy something else.

It's also completely ineffective. As soon as it becomes possible for shareholders to advise directors to cut executive pay, the executives will start demanding ironclad guarantees of their base pay in their contracts. Satisfying as it might be, the shareholder action becomes an empty gesture.

Now, some people in Congress, notably Barney Frank, are calling for something stronger. They want to make it possible for shareholders of public companies to take binding votes, rather than advisory ones, to reduce executive pay in response to poor performance. Again, it's hard to see the economic rationale of something like this. Is Barney Frank saying that the employment contract of a senior executive should be subject to unilateral revision by one party? How then could such an arrangement even be called a contract?

Or is he saying simply that he wants to enable shareholders to take a small dose of revenge, limiting poorly-performing executives to their base pay and no more? Why can't boards of directors do that today? There's no value added here other than political atmospherics.

But now there's yet a third model, represented by the White House "Czar of the Week," Kenneth Feinberg. In theory, Feinberg, the "Pay Czar" will have unspecified but broad powers to dictate the compensation arrangements of executives in companies receiving government assistance. (I suppose for a start that means the automakers and the TARP-recipient banks.)

In this model, executive pay will become a direct concern of the White House. They would decide how much people should get paid. Someone needs to explain to me just exactly how this can be accomplished across a broad economy without creating either an unworkable, one-size-fits-all pattern, or endless corruption. And even beyond that, there's the chilling uncertainty created, as the rules could change at any time. Why would you bust your hump to do your best work, knowing that if the political winds go against you, you won't get paid your full salary?

In the final analysis, all of this bloviating over executive pay is nothing more than government interference in private contracts. (There indeed are some substantive issues in regard to pay, particularly relating to the financial industry, that I'll have to deal with another day.) But shareholders today have the right to invest in whatever companies they think are run best. And don't think the biggest hedge fund operators or university investment officers have to wait for an annual meeting to make their dissatisfaction felt. CEOs answer to their directors, and directors answer to shareholders. There's more than enough accountability in the process to protect the shareholders.

But there, in fact, is where the camel has stuck his nose under the tent. I don't hear Obama, Barney Frank, Kenneth Feinberg or anyone else talking about protecting shareholders. This isn't a garden-variety overinterpretation of the Securities and Investment Company Acts. What they're saying is that America as a whole needs to be protected from marauding, pillaging CEOs. Today, the argument is that companies receiving TARP money should face government scrutiny for executive pay levels because, after all, We The Taxpayers put in the capital that keeps them going. (And what exactly is our interest as taxpayers, other than revenge, to cut down the pay of executives? Presumably to keep from overpaying them with bailout funds.)

Tomorrow, the argument will extend to executives in all public companies. Already this is where Congressional Democrats are saying they want this to go. But who are we protecting? The common shareholders who are members of the public? I've already explained that they already have enough remedies for dealing with poor executives.

No, the real objective is to "protect" society at large. Given that, how difficult will it be to step beyond publicly-owned corporations and start dictating pay guidelines for everyone? For that matter, we've put tens of billions of dollars into preserving jobs and retirement benefits for the UAW. The taxpayers weren't a party to those private arrangements. Isn't it reasonable for us to insist that the government cut all UAW salaries, pensions, and healthcare payments in half? Just sayin.' Isn't the goal to keep the public from suffering financial harm by overpaying people on public assistance? Or is there personal animus against executives at work here?

I speak as a person who has argued often that CEO compensation is not only excessive in an absolute sense, but also very poorly reflective of actual performance. I think the vast majority of CEOs get paid way too much. But it still needs to be up to people, freely contracting with each other, to determine what to pay each other. If the President of the United States decides that it's his job to determine what any given individual's labor is worth, for whatever reason and under whatever legal theory, then no private contract is safe, and we'll be well along the path to exchanging our free society for a government-run one.

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[tincup356]

It's time to get rid of ALL the idiots in Washington who have been there so long they think they are above the law.Picking between the Democrats and the Republicans, is about the same choice as a pick between the crypts or the bloods, ALL for groups are corrupt criminals,,,,the ONLY difference?,,,,the Democrats and the Republicans wear suits and ties,,,,,other than that ,,,they are all criminals. The conspiracy that BOTH parties of congress is engaged in with the banking industry amounts to nothing less than TREASON.

[markangeloo]

Duh why not create easy money !!!
Zero percent interest rates
throw the stuff out of helicopter windows.
Everybody will be to busy consuming to notice
any wars going on in reality.
U know the golden brick road of
William Jennings Bryant.
WORKERS OF THE WORLD UNITE
Capital is a pie; it is not illimitable.
Of course 1% could be permitted to take 90% of the pieces.
But would that be intelligent for the rest of us ?

[fredferg]

I guess it is time to have all voters decide on the pay of every single member of congress district by district. It would be foolish to let them continue to decide their own compensation. We can decide when we vote and any raises will not take effect until after the next election cycle, while any decrease would take immediate effect. Congress needs to remember that we are their bosses.

[8razman]

The "American Citizens" are the government of this country. Elected (used very loosely) officials are not. Obviously, they have forgotten this and now want to tell each of us what we're worth. Wasn't that tried oh, I don't know, maybe a couple of hundred years ago??? Just a hunch but I don't think that's going to fly. I say the government needs to get it's ugly foot off of the "Rights" of the American people. I will vacate my soapbox now.

[ajc1952]

I would very quickly agree that government needs to step in and cap the salaries of CEO's and top executives for sure. I work for a not-for-profit hospital where the workers salaries are determined (or so we are told) by doing a comparison study of the surrounding 4-state area. But the CEO of this hospital makes over 800-thousand a year in salary alone -- this does not count the "extras" such as bonuses, etc. Many of those in administration make anywhere from 200-thousand and up in salary and again this does not take into account the unjustified bonuses they get each year. The employees only get a meager bonus if the hospital reaches a level they determine to be fair if we get good customer satisfaction feedback such as a 6 on a scale of 1-10 for instance. We very seldom get a bonus for the financial payout which is more according to what your base salary is, but again, that is only if the hospital reaches a certain profit in the year. The administrative and CEO bonuses are not connected to the hospitals financial success or the patient feedback results -- they get their bonuses anyway and are very substanial bonuses that range in the hundreds of thousands of dollars.

Share the wealth and left the actual workers get ahead financially and kick start this economy as we are the ones that would be more willing to then spend that money and put it back into the economy.

[waverlypastor]

If Congress attempts to force companies to set certain salaries via shareholders, then Congress should be willing to stop being hypocritical as it relates to their own salary & expenses. Here are some facts:
1) The American people are like the shareholders, they elect people to represent us in the corporation called the United States of America.
2) Congress is like the Board of Directors of a very large corporation
Based on these facts, if Congress were to pass such a bill, then there should be a bill stating that Congress cannot vote for their own pay scales and expenses without the permission of the shareholders, namely the American people. Therefore all congressional salaries and additional benefits must be voted on by the American people during the general election before Congress can receive such benefits.
For Congress to insist on companies to do what they are not willing to do is hypocritical and dishonest.

[waverlypastor]

If Congress attempts to force companies to set certain salaries via shareholders, then Congress should be willing to be hypocritical as it relates to their own salary & expenses. Here are some facts:
1) The American people are like the shareholders, they elect people to represent us in the coropration called the United States of America.
2) Congress is like the Board of Directors of a very large corporation
Based on these facts, if Congress were to pass such a bill, then there should be a bill stating that Congress cannot vote for their own pay scales and expenses without the permission of the shareholders, namely the American people. Therefore all congressional salaries and additional benefits must be voted on by the American people during the general election before Congress can receive such benefits.
For Congress to insist on companies to do what they are not willing to do is hypocritical and dishonest.

[markangeloo]

WORKERS OF THE WORLD UNITE

Capitalism already is defined as
control of the money pile.

[markangeloo]

And labor wages are not controlled already
by not allowing for the organization of
The International Workers Union ?

Naive amerikans learn your communist dialectics.

[nursemark-2009]

The board of directors repersents me? Since when did they represent anyone but themselves, or maybe the CEO and other top personal. Look at who they are all directors of other companies, all rich fat cats. Try putting on the board a few of the people who work there if you want to represent the stockholders of the company.

Maybe there should be a pay for preformance clause in their contracts. You do well you get paid well. Run the company into the ground, your refund the stockholders what they lost, out of your pocket.

[mnbrant]

The government ALREADY DECIDES my salary. $819.00 each month, for me and to keep my wife on. I'm on Social Security. They let us borrow $250.00 on a stimulus program, which we have to pay them back, next year, from what is being broadcast on the news. SURE, US GOVERNMENT DICIDE ON THE SALARIES, give all American couples a flat 819.00 a month, that won't even rent an apartment in a poor mans gehtto.
Beware, the hard times are still to come, we are draining this planets resources, when she gets drained enough. Watch.
Posted by aztecdakota at 3:11 PM : Jun 12, 2009

I got a friend living in Souix City Iowa paying 315.00$ a month for a 1 bedroom. Move there. I surely intend to when I retire. MMM cows.

[SteelersWinAgain]

Happy camper. My penguins won tonight too. I predicted it. Posts on file to prove it. Happy, Happy me!!! How often will your NASCAR driver, your college football team, your pro football team and pro-hockey team all win the big time in one season?? I am in sports heaven!!

[SteelersWinAgain]

SURE! The government is WELCOME to determine my salary as long as it increases at least at 1/2 the rate of CEO salaries, and that is BEFORE reviews, which certainly should have latitude. The government failed to move minimum wage for years. Minimum wage was established to avoid sweatshop conditions and encourage fair pay for workers. The government failed to adjust minimum wage to the cost of living and CEOs and their gangs continued to get richer and richer while all the rest of their workers got poorer and poorer and have been expected to produce more results all the while.

[forrestlayne]

it is apparent that the present system of setting compensation for executives in large public corporations is not working.
Posted by arkieguy at 12:06 PM : Jun 12, 2009

Yes it is - Had the free market been allowed to work - those poorly run companies would have went bankrupt - out of business for poor business decisions. The BOD's made dumb salaries possible, bleeding money from the companies and limiting the ability for re-investment. These companies should have failed.

BUT - NNOOOO - Big government had to step in and save their sorry butts with our money. It is called privatizing profits and publicizing losses. A few select made millions and we taxpayers ate the losses. Both Bush and Obama did this -what's the difference between dems and reps?

[Void_Master]

If the government is bailing the company out (paying its bills) then yes, the government should have full power to set salaries. If the company doesn't like it, they can always refuse the money. If that leads to the company going under -- it's what should have happened in the first place.

[strangeworld]

When the taxpayers are involved in helping, funding, or allowing business through tax breaks, TIF funds, or other government help, I certainly don't see anything wrong with the government (aka the taxpayer) limiting the obscene salaries of the management of such corporations. American business...if you truly believe in free markets and capitalism, refuse public funding, aid, and tax breaks and run your business in the manner that fits those principals - if you instead choose to accept what amounts to corporate welfare, cut the BS and understand that taxpayers don't want to pay you millions of dollars a year while you run your business into the ground.

[aztecdakota]

The government ALREADY DECIDES my salary. $819.00 each month, for me and to keep my wife on. I'm on Social Security. They let us borrow $250.00 on a stimulus program, which we have to pay them back, next year, from what is being broadcast on the news. SURE, US GOVERNMENT DICIDE ON THE SALARIES, give all American couples a flat 819.00 a month, that won't even rent an apartment in a poor mans gehtto.
Beware, the hard times are still to come, we are draining this planets resources, when she gets drained enough. Watch.

[veils-2009]

Congress and Senators and other elected Goverment officials
should have income capps. - price53

Here here! What other body Than Congress can vote on and approve their own pay scale? The pay scale of government officials must have over sight by an independent institution. with the internet and vast education of the American people there should be more of a democracy in voting about these types of issues.

Congressional positions were never meant to be careers. More like jury duty for those financially capable of performing an under payed patriotic duty. Perhaps it is time to bring Congress back into the model our forefathers created.

[veils-2009]

The government already has by establishing minimum wages and then through Republican debauchery keeping these wages below inflation because these wages are the base for all other wages, except those of corporate executives. So, it is about time the government has a say about the big boys pay and maybe the playing field will be leveled, if only a little.