Government Say on Executive Pay? No Way

Last Updated Aug 4, 2009 3:54 PM EDT

Here's the setup: Two identical companies with identical executives that met the goals of their board-approved compensation packages. Everything's the same except one company received federal bailout money, the other didn't.

The prevailing wisdom seems to be that executives of the "bailout" company shouldn't get their bonuses. And while folks seem to take that as gospel, I can't think of a single reason why it makes sense.

Just this morning I was listening to a talk radio program. A caller was explaining that his father - a former executive at a Fortune 500 company - got big bonuses because his division was profitable even though the company wasn't.

The host asked, "Did this company get bailout funds from the federal government? Was it funded by taxpayer money?"

"No," the caller replied.

"Well, there you go," said the host and disconnected the caller. It was as if the host had just stated a universal truth that ended all debate.

That got me thinking, what's the difference? So the company got federal money. So taxpayers paid for it. So what? How is that different from an identical company getting investment capital from any other source?
Look, companies raise capital through a variety of private and public vehicles.

Debt financing typically has covenants that, if unmet, void or activate certain payment terms. But I've never heard of a covenant on executive compensation.

How about public stock offerings? Most of that money comes from big institutional investors like Barclays, State Street, Vanguard, and Fidelity. But where do you think that money comes from? They're banks; they get their money from you and me. And they have no say on executive pay.

I bet if you did an objective analysis you'd find that "taxpayers" spend way more - probably by orders of magnitude - "bailing out" companies through their investment portfolios than by federal government bailouts.

Look, there's absolutely no difference between a company getting federal funding and a company getting funding from any other source, save one. The former involves politicians, and politicians love to get their constituents riled up about "taxpayers footing the bill for multimillion dollar bonus packages" so they can enact legislation to take control and look like heroes in the process.

As White House Chief of Staff Rahm Emanuel once said, "Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before."

So don't get sucked in by all the hype. In fact, I think it makes sense for shareholders to have a say on executive pay. I just don't think "bailout" companies should be treated differently and I don't think the federal government should use the economic crisis as an opportunity to pass legislation they couldn't pass before.