This is a bad idea for two reasons.
First, pay is not the federal government's business. Period. It smacks of a command economy like the economies that existed in the eastern block. Those economies were at best jokes. They did succeed in making everyone equal -- everyone eventually became poor. The US is based on a capitalist model where the market sets the rates. Period.
But most importantly, this is a shareholder issue. For those of you who are unfamiliar with corporate law, the basic structure of a corporation is the shareholders are the owners of the company. They hire the board of directors who implement macro-level policy for the shareholders. The board also hires the managers who carry out the day to day operations of the company. However, this whole situation boils down to the shareholders -- it is their responsibility to vote for or against directors. It's also up to the shareholders to get rid of directors they don't like or who are not doing well for the company. If you don't like the way the company is being run you have two choices: sell your shares and stop being an owner or figure out a way to start working with other shareholders to effect change at the company.
This does lead to a second point: does US corporate law need to change? That is, do we need change the way corporations are governed? That is always a possibility. However, that is something that has to happen at the state level where corporate law is created.
Consider this passage from a blog posting of activist investor Carl Icahn:
It is unfortunate that it took a force the size of the U.S. government to shake up the board and management at GM. In effect, the government has become the world's biggest activist investor, making the same kinds of demands that any activist or creditor should rightfully make in return for its investment.
Shaking up managements and boards is a no-brainer at underperforming companies for activist hedge funds and private equity firms, including Quadrangle Group, which Rattner co-founded. Why should investors tolerate poor performance? Why should taxpayers?
I have shaken up boards and managements at many companies in which I have invested, including Blockbuster, ImClone, Stratosphere, Philips Services, Federal-Mogul and many others. Generally, but not always, the net result has been very positive for the company and the shareholders. It is important to get new blood, new strategies and new ideas into underperforming companies.
As the saying goes, 'if you do the same thing all the time, you get the same result.' This applies to many managers. Too many are one-trick ponies. America is losing its economic hegemony because of it.
But most importantly, it is up to shareholders to step up to the plate and demand changes at their companies. For too long and for a variety of reasons, shareholders have been complicit in allowing management excesses and incompetence by not taking a stand.
"Shareholders have reelected these directors, have approved these pay plans and have been enablers for the addictive behavior of the corporate community," said Nell Minow, editor and co-founder of the Corporate Library in a recent BusinessWeek interview.
Let's hope the global economic meltdown causes shareholders to demand more changes on the part of their companies -- and not leave it to the government.
5 comments:
The big problem with limiting their pay is a pretty simple one: why would you continue to be an executive at a company where your pay was being capped by the government?
Now sure, we might want those "bad" executives to leave but then who would fill in for them? The logical answer is that people who couldn't get jobs for better pay elsewhere. I'm not going to argue that the current executives are the best and brightest, but capping pay would do a lot to insure that those banks would have the least capable people working there.
The problem with the people running these banks isn't that they are overpaid. The problem is that the entire incentive structure for these banks rewards aggressive risk taking and punishes prudent risk management. Changing the pay scale for them isn't going to fix that problem.
But in the end, that's a reflection of our entire culture. Everybody wants their pay day now. The CEO's, the stock holders, the employees, and everybody on down wants to scratch that lottery ticket and get paid right now. So unless that changes, no amount of government intervention is going to fix it.
Interlocking boards are one problem, an easily identifiable problem. Another more insidious problem is greed. There has to be a negative, economic respose to too much greed. The way our corporations are structured, the top management is insulated. Shareholders really have no voice. So the shenanigans continue. Until we find a way to give shareholders a REAL vote, this activity will exist.
The government shouldn't be involved in bank pay decisions, because the banks don't owe their survival over the last year to the government! Oh, wait...
It's symbolic, but it's an important symbolic step for the government to force $200,000 paychecks on executives of these largest banks, if just for a year or two until they're paid back their government loans.
And your comments about shareholders is ridiculous. Everybody knows shareholders beyond the top few have absolutely no say, and the top few shareholders are usually part of the company or at least the system of overpaid executives.
OK I agree- I don't think the federal government should be involved in setting pay limits. But there is this little matter of deposit insurance (notice I am not even bringing up the issue of TBTF).
When you say, "First, pay is not the federal government's business," you are wrong.
When the US government forbade stockholders from making binding votes on executive remuneration, it became the government's business.
If shareholders could vote on executive pay, I could argue that it might be a purely private matter.
But that is currently illegal, and so the owners have little or no say on how much executives are paid.
The idea that GS is showing restraint because it is "only" spending 20% of revenue on bonuses is a sign that executive remuneration in publicly traded companies is broken, because the executives are unwilling and unable to act in the best interests of the shareholders,
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