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Should the Government Cap Executive Compensation?

Generally, No, But Companies Saved by Taxpayer Bailout Are Exception

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Should the government set or limit the compensation corporate executives receive?

The short (an incomplete) answer is no. The government should not be in the position of capping or limiting the salaries of corporate executives.

That is inconsistent with a free enterprise market system.

However, we don’t have a free enterprise market system when key companies (investment banks, for example) are deemed “too big to fail.”

I don’t argue with the “too big to fail” reasoning. Clearly, if the government had let AIG, Goldman Saks and others fail, we would be in a much deeper hole.

The fact that Bear Stearns (an investment bank) was allowed to fail and that single failure precipitated a global financial crisis should be evidence enough.

As the U.S. economy slowly and painfully climbs out of this crisis (leaving 8 million plus without jobs), talk is stirring that the executives responsible for the crisis should have their wages capped.

In particular, companies that received bailout money (tax dollars) are the focus of the attempts to limit compensation.

A couple of things need to happen:

  • No company should be so big or important that its failure would bring down the whole economy. If this means breaking up large financial companies into smaller units, then for the sake of the whole economy, this should happen.
  • Executives of companies that received tax dollars to avoid collapse should have limits (for a defined period) placed on executive compensation.

Not a year has passed since the U.S. taxpayer bailed out many of the biggest financial companies and already they are preparing to hand out billions in year-end bonuses.

While caps on executive compensation for most companies (those that did not benefit from taxpayer bailouts) are inappropriate, there is a legitimate concern that taxpayers should not underwrite huge compensation packages.

Generally, executive compensation is a tax deduction for the corporation, so the taxpayer is underwriting part of the package.

There is a movement to include as a significant part of financial reform limits on the amount of compensation a company can claim as a tax deduction.

For example, if a company wants to pay an executive $10 million in compensation, that should be its decision.

However, if the government said only $1 million (for example) could be deducted as a business expense, then taxpayers would not be subsidizing the balance.

Unfortunately, the government has been tinkering with such a limit for some years. The results have only changed the way executives are compensated not how much they are compensated.

The answer to outlandish executive compensation is for stockholders to vote in boards of directors that will look out for their interests and vote out politicians who benefit from a percentage of those outlandish compensation packages in the form of campaign contributions and consulting jobs after they leave office.

Too often, boards are populated by either insiders with a vested interest is keeping the CEO happy and/or other CEOs who want their boards to be as generous as they are with executive compensation.

However, when reality overcomes ideology (as it always does), don’t expect much to change.

Money makes policy in Washington and guess who has the money?

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