Laying down the law on executive compensation

The U.S. government has tried various ways to reign in executive compensation, mostly through tax disincentives, and I think we can see how well these attempts have worked. The $1 million cap on salary tax deductions caused compensation packages to balloon with stock options, deferred compensation and perks. When the government put severe tax penalties on golden parachutes that exceeded 2.99 times the annual salary, companies simply pushed severance right to that limit. Prior to that, most companies were providing only one year’s salary. The government has always stopped short of putting a direct cap on CEO pay, though. Now President Obama has thrown down the compensation gauntlet. No executive can earn more than $500,000 per year if his or her company is receiving federal funds. In his statement on the subject, Obama was clear that this was not about retribution, but about not rewarding executives for failure, “especially when those rewards are subsidized by U.S. taxpayers.”

Truth be told, that $500,000 number is not a hard line. Companies can still pay executives more if they want to, with additional compensation being awarded in the form of stock that could not be sold until the government is paid back. No one knows when that might be, though, if at all. Also, companies that are not completely failing, but which still receive Troubled Assets Relief Program (TARP) money, can have the cap waived with a shareholder vote and public disclosure. Oh, and one more thing, this cap does not affect any company that has already received funds, such as AIG, Bank of America and Citigroup.

So, is this anything more than symbolism? In one sense maybe it doesn’t need to be anything more than that. Obama can show the American people – who are fed up with hearing about bonuses, lavish parties and private planes for bailed-out companies – that failure won’t be rewarded. Taxpayers, including me, get angrier and angrier the more they hear about this stuff. It’s my job to research executive compensation, so I read about these pay packages every day. At the same time, I research layoffs and restructuring. It’s hard to feel good when you see how many people are losing their jobs while executives keep getting paid more and more. I don’t think anyone really begrudges someone the opportunity to make a lot of money. It gives people something to aspire to or at least dream about. The problem is, it seems terribly wrong that these executives can make so much money regardless of how awful they seem to be at doing their job ... unless their job is simply to see how much money they can earn. But the amount of money these executives earn is a tiny fraction of the money involved in the financial meltdown, so the cap really is about symbolism. Even many Republicans, not a group quick to want regulation, agree that there has to be some kind of accountability for companies receiving federal money.

Aside from the feel-good aspect, what will this accomplish? Are any of these executives really going to stick around for $500,000 a year? Will these new rules shame executives into working straight commission? I’m not sure anyone really believes that. These people do the work they do because they can make a lot of money. I wouldn’t be surprised if many of the executives involved simply leave their companies. The chances are pretty good they’ll end up somewhere making more than $500,000 a year. So, who does the company get to replace them? Who is going to come in to rescue a failing business for $500,000 a year? OK, maybe I would, but I don’t think I’m quite CEO material yet. Have we now severely hamstrung businesses that are going to need the best and brightest to guide them through? Worse yet, the threat of an executive pay cut may keep banks that need the money from entering the program in the first place. In the end, this measure may just become another challenge for high-paid compensation consultants and lawyers, who have managed to find ways around just about every piece of compensation legislation ever written.
David Wentworth
David Wentworth, Senior Research Analyst
David Wentworth has been a research analyst for the Institute for Corporate Productivity since 2005. David has previously worked with digital media development and delivery, and currently researches several topics for i4cp, including workforce technology and the outsourcing of human resources. David has a bachelor’s degree from the University of Massachusetts.