A Government “Pay Czar?” Come On, Obama

Last week, the Obama administration proposed new pay legislation for corporate executives accepting government bailout money and the appointment of a so-called “Pay Czar” to enforce these changes and monitor compliance.  The proposals, which aim to give shareholders more say in executive compensation decisions (via a direct shareholder vote) and broaden the powers of the Securities And Exchange Commission (SEC) look  positive on the surface, but I fear these proposals go too far, much too far, in giving control of what is essentially a private business decision over to the public and putting the ultimate decisions in the hands of those not prepared to make them.

Don’t Shareholders Already Control Executive Pay?

Don’t shareholders, as owners of the corporations, already control executive pay?  That’s a rhetorical question:  of course they do, albeit indirectly.  Shareholders do not vote directly on how much their executives should be paid, rather, they elect board members who then set executive pay based on a variety of market factors.

What factors, you might ask?  I don’t pretend there isn’t a thriving “good ‘ole boys” club on Wall Street;  there is, and it sometimes results in executive pay being more than is justified.  Board members sometimes aren’t as independent of management as they ought to be, an occurrence Obama’s new pay legislation hopes to rectify.  I fully support all reasonable efforts to increase the independence of corporate board members and their accountability to shareholders, but Obama’s current proposals go too far.

Simply put, there are good reasons why the board sets the executive pay and not the shareholders directly.  For starters, the average shareholder has no idea what the executive job market is like nor what reasonable compensation would be.  Were it left to shareholders, they would likely shoot themselves in the foot hiring sub-par management trying to save a few bucks on payroll.  Shareholders elect board members for the same reason citizens elect representatives:  the average individual is simply too busy  and not privy to enough relevant information to make these decisions.  Thus, we elect representatives whose sole job is to educate themselves on these issues them for us.  If the board does a poor job, shareholders are free (and very willing, historically) to vote out the board and replace it with individuals more in tune with their interests.  So you see, shareholders already have complete control over executive compensation.  They merely delegate it to the board.  No changes need nor should be made to this process.

Should Taxpayers Have Any Say At All?

Taxpayers deserve a say on executive compensation of bailed-out firms, the argument goes, since they are the ones who foot the bill to keep these companies afloat to begin with.  I don’t dispute many of these firms would no longer exist without taxpayer help, but I do dispute the notion that taxpayers (and the government) should be allowed to change the bargain after the fact.  If the government wanted executive pay concessions to be a condition of receiving bailout funds, they should have made that clear from the beginning.  Probably fewer companies would have accepted bailout money had that been the case:  only corporations truly in desperate need would have made that bargain.

But pay concessions were not explicitly required at the time the transaction was completed.  As everybody knows, once you sign a contract, the deal is sealed.  Unless there are specific provisions in the signed contract allowing modifications under certain circumstances after the fact, it’s a done deal.  The contract cannot be modified after the fact nor can the terms change.  Why then, does the government think it has the right to modify the terms of its bailout deal after the transaction has already been completed?  In my opinion, they don’t.  The Obama administration did a poor job of negotiating the terms of the bailout from the outset and now must live with the consequences.  Crying foul over executive pay practices you knew of and could have done something about at the time bailout money was issued is petty and reeks of partisan pandering.  President Obama, you messed up.  Deal with it.  It’s unfair to bully your business partners after the fact.

I fear this new legislation along with the introduction of a corporate “Pay Czar” is a dangerous step towards government control of our private corporations.  I am all for reasonable corporate regulation aimed at protecting the public, but not at the cost of giving government the power to directly invalidate dictate corporate policy, some of which have existed for centuries (Citigroup is over 200 years old, for instance).  At the end of the day, government regulation is only effective if kept at arms length from private business.  The government’s right to regulate private enterprise is unquestioned so long as it remains neutral, objective, and stops at merely providing a framework for how business should be conducted.  That is, regulation is sometimes useful in defining the “whats” of the broad economy.  The “how” and “why” of how businesses conduct themselves, however, must remain strictly off-limits to government tampering.  Executive compensation undeniably falls under the “how” moniker.