President Obama has proposed restrictions on the pay of top executives at banks that are getting bailed out by taxpayers. It remains to be seen how effectively these restrictions, which would set a maximum salary of $500,000 a year for these corporate officers, will be applied, but lower pay for top executives in the financial sector is a good idea that can help set an example for the rest of the economy.
The tens of millions of dollars received by top executives in the financial industry set a standard that executives in other industries strive to match in the same way that a record contract signed by a sports superstar turns into the new benchmark for other top athletes. Perhaps a sharp decline in salaries in the financial sector will set in motion a trend toward lower pay—whether enacted by the government or by the corporations themselves—for CEOs and other top executives in other sectors.
Rewriting rules on corporate governance to provide shareholders with more control on pay would aid this trend. For example, if companies were required to win shareholder approval for executive pay packages in real elections (unreturned proxies don’t count), it would go far toward reining in the pay of top executives.
President Obama should take advantage of the extraordinary opportunities in the current political and economic environment to rebalance the relationship between corporate management and shareholders. This would be the best and most immediate way to limit executive compensation.
Like Bush, Obama is using our tax money to bail out AIG (AIG), GM (GM), Bank of America (BAC), etc. In return many Americans expect, not unreasonably, that our government should now be able to dictate to these companies how to run their businesses, including what to pay their CEOs. But do we really want America’s largest corporations taking orders from members of Congress, government bureaucrats, and professional lobbyists? I think not.
Instead, we should end the bailouts, repeal the numerous government regulations that have distorted the free market, and let companies sink or swim on their own merits. That’s the American way.
But letting the government determine pay for all corporations? A CEO can mean the difference between a company’s success and collapse—just think where Apple (AAPL) would be without Steve Jobs. Shareholders have a moral right to pay whatever they judge necessary to attract, retain, and motivate talented leaders.
What about not-so-successful CEOs who walk away with millions while their companies tank? Shareholders are free to insist on clawback provisions and other contractual measures. But a government-enforced cap on CEO pay would punish the best CEOs by denying them the huge rewards they earn by creating vast amounts of wealth.
The only sure result of this injustice would be a flight of the best and brightest from public corporations.
Government mandates on CEO pay mean CEOs lose, shareholders lose, and all those who benefit from dealing with public companies—i.e., all of us—lose.
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