CEO salary cap unhelpful
If you think about it from a poor college student point of you, you’re probably thinking “half a million? For leading a company into bankruptcy? Sign me up!” There is an obvious point to be made that federal government funds shouldn’t be spent on excessively lush corporate salaries. In fact, I completely agree with that. I hate to think of my hard earned tax dollars paying already wealthy executives more, but I think this Executive Order completely missed the mark in a number of ways.
First of all, the philosophy behind it is all wrong. It is never, under any circumstance right for the government to assign a dollar value to the worth of the work done by anyone in the private sector. The beauty of a Capitalist economic system is that people are paid what the market will bear. If companies find one person’s leadership to be worth three million dollars, then they should be paid accordingly. If a company far overpays their executives then they will likely end up bankrupt and out of business. That is unless of course the government intervenes and bails them out, which is just as philosophically wrong as the government capping salaries.
The second reason this is bad is because companies that are struggling will probably make up the compensation difference by paying their executives in stock options. In moderation this is a wonderful thing. Stock options encourage employees to take an interest in their company as they too are rewarded for corporate success. That being said, if salary is based solely around the value of stock, executives will be more likely to take actions that heavily inflate stock prices to a point where they shouldn’t be. For instance, a company that buys back stock will increase the value per share, just because there are fewer shares. This is just one way that a CEO would have the power to wrongfully increase their compensation.
The third reason that this is bad for our economy is because assuming that total compensation per executive is limited to half a million, executives will leave the financial market. I doubt they’ll quit to become a teacher, scientist or almost any other job because most jobs are paid far less than $500,000. But they might realize that with the money that they have in savings they could sit on their bottom every day and watch Maury and make more than $500,000 a year in interest. In essence, when you have $15,000,000 in the bank, what difference does $500,000 make? President Obama’s executive order will likely cost our nation some very good financial minds.
The fourth reason this is bad policy is because most of the executives that put bailout receiving companies in such financial trouble are long gone. Why would a company want to keep a terrible executive? So these companies hire new executives. President Obama is punishing these executives by limiting their salary because of the mistakes made by their predecessors. Imagine you were a CEO new to a company receiving bailout funds, and your salary has just been capped at $500,000, but then you see another company that is not receiving bailout funds, but is offering to pay you $25,000,000 per year, which company do you think you’ll work for? It’s a shame to think of all the good talent that companies in dire straits will be losing because of President Obama.
The final reason why this is terrible policy is because President Obama had the opportunity to make great policy…and he blew it. The real compensation culprit isn’t billion dollar companies paying a good executive a million, or even a few million dollars per year. The true culprit is when corporations pay terrible executives hundreds of millions of dollars in severance packages. MSNBC reported in 2007 that Home Depot CEO Bob Nardelli was awared $210 million in a severance package for quitting. That was not a typo, nor is Pfizer’s Hank Mckinnell who was paid $180 million for being fired. Lee Raymond, CEO of ExxonMobil quit and was paid $400 million in a retirement package. The absolute worst of all is probably Disney’s CEO, Michael Ovitz, who was awarded $140 million for being fired after just fourteen months on the job (or $10 million per month, $1 million per 3 days, or about $333,333.33 per day).
President Obama could have used his Executive Order to cap CEO severance packages at one year’s total salary. This could have saved all companies hundreds of millions of dollars, and Wall Street would love it because they wouldn’t have to continue to increase retirement/severance package values on their executives in order to hire the best ones. Unfortunately, President Obama saw the opportunity to play class warfare with a populist policy and decided that was more valuable than actually helping the economy.
Posted by Colonnade Archives
on Feb 13 2009. Filed under Opinion.
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