Will Obama’s Executive Pay Caps Work?

The media is full of opinions on whether or not Obama’s proposed $500,000 pay cap is a good idea.  Predictably,  there are many who think it’s a good idea.  Others, like Oppenheimer & Co’s Meredith Whitney, think the restriction would hinder companies in finding and retaining the best candidates for the job.

The Proposal

The gist of the proposal is this:  if a company accepts bail-out money going forward, it will be barred from paying its executive more than $500,000 per year including cash salary, bonus, and immediate stock grants;  however, the proposal includes a loophole.  Companies would be allowed to grant executives as much stock as they want with the caveat they wouldn’t be exercisable until after the company has repaid the government in full.  So is the proposal a good idea?  I have my own ideas.

Pros Of Executive Pay Caps

• Only Companies Truly In Need Would Accept Bail-out Money – Executives who weren’t absolutely certain their company needed to be bailed out wouldn’t accept tax-payer money if it directly reduced their own pay.  This would keep companies away from the “hey, free money” mentality and avoid massive tax-payer waste.
• Executives With A Successful Turn-Around Plan Would Make A Killing – Talented young executives who orchestrate a successful turn-around would do at least as well under the new arrangement than under the old due to the restricted stock grants.
• Fresh Blood In The Saddle – The new compensation restrictions would likely encourage older executives to retire rather than take a severe pay cut, opening the door for energetic young executives with new, innovative ideas to take over.  Many would say this crisis is evidence that the old way of doing things doesn’t work.  Why not try something new?

Cons Of Executive Pay Caps

• Might Lead To A Brain Drain – The best and brightest will figure out how to make money regardless of what the government does.  If they can’t make it on Wall Street, they’ll go elsewhere with potential negative consequences for the nation’s financial stability.
• It Might Set A Bad Precedent – Allowing the government to directly dictate private salary terms might set the stage for even more invasive future market distortions.  History has shown the economy works best when left more or less alone over long periods of time.  Sure, sometimes there are problems, but there is little evidence the government could do any better.  In the past, they have done considerably worse.

My Opinion?

My opinion of the restrictions is actually quite favorable.  They are limited only to those firms accepting tax-payer money.  I think if tax-payers are effectively investing in a company, they have the right to demand as favorable of terms as they can get, just like any other private investor.  If certain companies are willing to accept our money, they should have to abide by the terms we set forth.  If companies aren’t willing to accept those terms, they don’t have to accept any money.  Certainly a blanket requirement that all executives receive a pay cut would be unacceptable government interference, but in this scenario I see the government in more of a private-investor capacity than a governmental capacity.  Thus, I have no problem with this plan on general economic terms and don’t view it as a violation of free trade principles.  Will it work?  I have no idea.

What do you think?

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