Executive Pay Limit a Sham

The much-touted CEO pay limits are a joke, Amit Paley reports in a page 1 story for WaPo.

Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules. But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.

Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.

[…]

The modification reflects how the rapidly shifting nature of the crisis and the government’s response to it have led to unexpected results that are just now beginning to be understood.

[…]

Congressional leaders from both parties thought Paulson wanted the distinction for extraordinary cases like American International Group, which the government seized in September. He wanted to be able to push executives out of companies that the government controlled and have the flexibility to bring in strong new executives, said one senior congressional aide. “The argument that they were making at the time is that the direct investment was going to be used only in circumstances where the company was AIGed, so to speak,” said a senior Democratic congressional aide.

The problem here is twofold. First, the government is in a frenzy to DO SOMETHING NOW despite not having the foggiest idea what’s going on. Congress allocated hundreds of billions of dollars for one crisis and, by the time the bill was signed, we decided that we’re in an entirely different crisis that called for a very different solution. Second, while it makes perfect sense to make sure that incompetent executives aren’t being paid off with taxpayer bailout money, the fact of the matter is that most of these people have contracts — which Congress is constitutionally precluded from modifying — and money is fungible. Further, Paulson is right: You’re not going to attract first rate CEOs to come in and fix a failing business at junior executive pay.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Alex Knapp says:

    You’re not going to attract first rate CEOs to come in and fix a failing business at junior executive pay.

    Of course, because there are only about three first-rate CEOs, you’re more likely to attract second and third-rate CEOs…

  2. odograph says:

    I think some of the haste and confusion might rise out of the idea that IF we verge on something like our 1930’s or Japan’s 1990’s, then we only have one chance to head it off.

    As I observed last week though, tide is turning a bit on what confidence we have in macroeconomic prescription. A snippet from an otherwise puff piece:

    Despite his quicksilver mind and professional expertise, Cowen, like so many of the nation’s great economists, failed to anticipate the severity of the current crisis. And when it comes to putting the economy right, Cowen warns: “We still don’t know what we’re doing.”

  3. anjin-san says:

    You’re not going to attract first rate CEOs to come in and fix a failing business at junior executive pay.

    Ah, like the first rate CEO’s that led these companies to the edge of the cliff they are now at?

  4. tom p says:

    the fact of the matter is that most of these people have contracts — which Congress is constitutionally precluded from modifying —

    Hmmmmm… Kinda like the UAW contracts with the Big 3?

  5. Dave Schuler says:

    Piling on to the comments above, is it true that higher compensation ensures a “first rate CEO” or does higher compensation ensure a CEO that is motivated by higher compensation? Is higher compensation the only possible motivation for taking a job as the CEO of a top financial firm?

    There’s another issue that I think is worth considering: the compensation base for the financial industry is completely unmoored from the realities of today’s financial industry. The expectations need to change to match the changing circumstances and there’s no time like the present. As evidence I’d present the significantly lower capitalization and earnings of the companies involved.

    This isn’t a problem unique to the financial sector. If we hold to the notion that executives’ pay should be based on performance (a fiction, I’ll grant, but humor me), how should executives in industries that have taken huge losses and have almost no capitalized value be compensated? It seems to me that in some cases in which tens or hundreds of billions of dollars of capitalized value has vanished and the assumed debts number in the tens or hundreds of billions that $1 a year might be paying too much.

  6. odograph says:

    I believe some of the Freakonomics guys have shown a correlation between higher pay and lower performance. Of course the causality there is difficult to square. Desperate companies may pay more for the same quality executive. Or companies who are fat enough for high compensation may be ripe for a fall.

    With respect to the current crisis, I’d remind James that compensation is a bid and ask process. Bidders only need to beat other employers. Who, in this market, really wants to hose down executives with cash? I’d think few, and to preserve pay structures created in fat times is probably not required.

  7. Franklin says:

    First, the government is in a frenzy to DO SOMETHING NOW despite not having the foggiest idea what’s going on.

    Yeah, that was my major concern with the bailout in the first place. Suddenly we need $700B, pronto! It sounded very suspicious as I told colleagues at the time. There was little time given for the public to analyze and reflect.

    In hindsight (for me), clearly one wouldn’t want to limit the pay of incoming CEOs to clean up the mess. It was really only meant as punishment for the ones who f**ked up and were in need of government assistance. And considering the existing contracts couldn’t legally be changed, there was really no point at all, was there?

    Just to be clear, though, we as shareholders should be more demanding that CEO bonuses are linked to our own profits and possibly to the company’s net gain in jobs. It doesn’t do much good to cut 1,000 jobs at $50K/year if the CEO gets a $50 million bonus.

  8. odograph says:

    Isn’t AIG doing special “retention bonuses” to keep the people who made the mess?

    (I have no problem with the hardcore capitalists at the tops of these firms accepting the creative destruction. The alternative is to continue ‘private profits, socialized losses’.)

  9. roger o. says:

    Good point Tom. So i was against any bailout to anybody. Let them all sink, there own fault and let Frank and Dodd go off to prison. Let them meet bubba.

  10. JT says:

    If Congress wanted to try and affect the salaries for CEO’s of public comanies (which it has absolutely no right to do) then they should try and tie executive pay to stock performance. Zero base base pay with commission based upon how the stock was doing would certainly force CEO’s to put their A-game on constantly.

  11. Drew says:

    There simply is no defending the practices of the compensation committees of Boards of large companies. Miserable. Period.

    That said, while we are busy scolding private enterprise, has anyone taken a look at the performance of government recently? War on Poverty – failed. Medicare – going broke. Social Security – constant triage. Infrastructure – crumbling. Freddie and Fannie oversight – blind. (That’s you, Barney and Chris.) Not to mention Senate seat peddling Governors….. etc etc

    And yet we keep letting government grow larger, taxation higher, accepting poor results……….and electing many, many of the same pols over and over.

    The analog to the Board compensation committee is the voter.

    He who lives in a glass house……..

  12. charles johnson says:

    the fact of the matter is that most of these people have contracts — which Congress is constitutionally precluded from modifying — and money is fungible.

    Weren’t republican senators demanding lower pay for UAW workers as a condition of supporting the bill? The current UAW contract goes through 2011.

    You’re not going to attract first rate CEOs to come in and fix a failing business at junior executive pay.

    Even Warren Buffet says CEO compensation is currently ridiculous. You can’t tell me that it’s impossible to find a smart businessman who will work for $1 million a year. Executive pay at the moment is nothing but theft from the shareholders, enabled by incestuous corporate boards.

  13. charles johnson says:

    Stanley O’Neil got $150 million dollars to crash Merrill Lynch into the side of a mountain.

    Clearly, you need lots of money to get first-rate executives like that.

  14. Drew says:

    Isn’t it interesting that all the vitriol about pay is limited to the failures of top business execs?

    Rappers who’s primary talent is singing – and I use that term in the most liberal sense – about how they will abuse women are spared. Basketball players who can run the court, although routinely finding themselves in court, are spared. $20MM center fielders who lead the league in strike outs are spared.

    The reason? EZ. Execs are associated with Republicans, although our incompetant friends from Goldman lay waste to that. And the others are entertainers, and between our sick adoration of entertainers, and their association with the left, innoculates them.

    Silliness.