Dealing With the Devil Has its Consequences

Former President Ronald Reagan was reportedly fond of saying that “the nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help.’” Top executives at financial institutions and other companies bailed out with federal funds are about to find out, the hard way, exactly what that means.

We learned yesterday from a New York Times report that Kenneth Feinberg, the White House “Pay Czar,” is prepared to institute severe pay restrictions under which the Obama administration will order the entities which received federal aid to slash annual salaries of their 25 best-compensated executives by as much as 90 percent for 2009.

Why now? Well, it’s a populist move, and could very well be en vogue in a White House currently struggling to unify its Democratic Party base for an important vote on health care reform. And, of course, it’s evergreen for the administration for which Marxism never is out of season, as control over executive pay fits right in within an agenda identifiable by its penchant for wealth redistribution and tireless work in perpetuating mediocrity.

What’s most alarming, though, are the people who buy into the populism. CNBC host Jim Cramer, for example, was on record yesterday saying that he is in total agreement with the move, that he doesn’t “feel any sympathy for these people,” and that the further government intrusion will place “more pressure on these companies to raise capital to get the government off their back.”

I’m no expert, and capitalism sure hasn’t been as kind to me as it has been to Jim Cramer, but give me a break. Now, we’re suddenly looking at financial growth as a byproduct of excessive government intervention? Can Mr. Cramer point to a situation where this has happened before?

And don’t get me wrong — the government intervention is excessive. Consider this, from the Times piece:

At the financial products division of the insurance giant, A.I.G., the locus of problems that plagued the large insurer and forced its rescue with more than $180 billion in taxpayer assistance, no top executive will receive more than $200,000 in total compensation, a stunning decline from previous years in which the unit produced many wealthy executives and traders.

In contrast to previous years, an official said, executives in the financial products division will receive no other compensation, such as stocks or stock options.

And at all of the companies, any executive seeking more than $25,000 in special perks — such as country club memberships, private planes, limousines or company issued cars — will have to apply to the government for permission. The administration will also warn A.I.G. that it must fulfill a commitment it made to significantly reduce the $198 million in bonuses promised to employees in the financial products division.

The pay restrictions illustrate the humbling downfall of the once proud giants, now wards of the state whose leaders’ compensation is being set by a Washington paymaster.

They also show how Washington in the last year has become increasingly powerful in setting corporate policies as more companies turned to the government for money to survive.

Please do not misunderstand me. I’m not suggesting that the pay schedules we’ve seen at some of these institutions are the right way to distribute taxpayer money. (In fact, I argued strenuously that taxpayer money should never have been used in such a manner in the first place, that the troubled companies should have been allowed to fail.) I’m merely suggesting that the likelihood of these companies achieving any significant gains while being led by $200,000-per-year talent is slim to none. “You get what you pay for,” doesn’t merely apply to small kitchen appliances and subcompact automobiles, after all.

Furthermore, remember that Barney Frank, architect of the housing meltdown, has advocated the extension of federal compensation-regulating powers to extend to all American companies, not just those which have taken federal money.

Obviously, what is done is done. What is past is prologue. To cap, or not to cap: that is the question — and to answer it, we need to cast aside the popular belief that our government does nothing to deter excessive pay for executives. In fact, embedded within the great equalizer and political favor facilitator that is the Internal Revenue Code is a provision–Section 162(m) to be exact–through which Congress has imposed a ceiling of one million dollars on the amount of compensation, including cash or anything else, that a private sector corporation may deduct in any given year as renumeration for services provided by a qualified employee.

In other words, businesses are permitted to deduct from their income “ordinary and necessary” expenses, including a reasonable allowance for salaries and other types of compensation for personal services actually rendered by the CEO or by the four highest-paid officers of a given corporation in a given year. Just as it has restricted deductions for so-called “golden parachute” payments in I.R.C. Section 280(g), Congress has put an arbitrary million-dollar cap on the deduction from income of an executive salary. Both are examples of ways in which the federal government can encourage or deter different levels of compensation.

Whether or not an executive’s compensation is deemed effective depends upon what is called the “independent investor” test. Under that test, if the unrelated investors in the executive’s company are still earning a reasonable return on their investment, then compensation is considered reasonable. Looking at companies like AIG in the light of this standard, and it’s pretty clear that, as far as deducting taxable income is concerned, the compensation of the executives were excessive.

Regardless, my belief is that the free market should be allowed to work as it does. If a company is thriving due in large part to its leadership, pay those executives what they’re worth. If a company is floundering because its leadership is incompetent or because, due in equal parts government interference and unbridled greed, the company ended up on the wrong end of a few too many credit default swaps, let that company fail.

In the meantime, I certainly hope that other companies, as well as the American people as a whole, look at what’s happening to these firms stupid enough to get in bed with government. America could use a practical lesson in the consequence of government interference, and the newest example of overreach will provide us with just that.

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Comments

  1. Robert Wallace says:

    I can't wait to see the numbers on how many of these executives quit. This is – without doubt – in the top 5 dumbest things this administration has done.

    It's the equivalent of buying a race horse and then shooting it. Now you're out $1,000,000 or so and you've got a dead horse.

    There probably should have been no bailout in the first place, but if you're going to bailout a company – meaning that the American taxpayers are now invested in that company – you absolutely should not follow up the purchase with decisions that cripple the company. And that's what is going to happen here.

    We can debate about executive compensation, but the fact is that as long as we're hammering only the companies we own we're creating a drastic income disparity between what you could make working for a gov't-owned and a publicly traded (or private) company.

    The result?

    Talent flight.

    If there are guys who have broken the law: prosecute them. If they haven't? Drop it.

    The fact is that most of the execs who landed these companies in trouble have already quit. The one who remain – by and large – trying to get the companies back on their feet again.

  2. Anonymous says:

    Robert gets it. I'm not justifying exorbitant exec pay, but that's what these execs earn due to commissions, profit sharing, etc. No one would accept a 90% pay cut when they could go across the street and maintain their current salary and lifestyle. These experienced execs are going to quit en mass leaving some of the top corporations in America without effective leadership. It's possible many will go bankrupt without their leadership, which is the very thing we aimed to prevent with the bailout money.

    What opportunity might this situation create? After all, these companies are too big to fail, right? We've also got too much money invested in their bailout to let them fail. The Obama administration could very well appoint people of their choice to replace the execs who leave.

  3. Rix says:

    Robert:

    > I can't wait to see the numbers on how many of these executives
    > quit. This is – without doubt – in the top 5 dumbest things this
    > administration has done.

    Wrong – unfortunately, it is one of the smartest things this administration did. If Obama's goal is to destroy American economy and take what remains of it under his personal control, he is dead on target. He'll squeeze out the financiers who are not onboard with the coup (Lehmans and Bear Sterns were probably first in line), and the remaining ones will share the loot, having traded the dogfighting of performance competition for a safe and stable position as "governmental banker" which is now reserved to Fed.

  4. Anonymous says:

    So the President who makes $400,000 a year in tax payer money is going to take a pay cut too?

    If he limits "executive" pay to $200,000 for people receiving government money seems he and Congress need to start in house.

  5. BRO, YOU MAKE TOO MUCH says:

    We need to limit the Presidents salary to 200,000, after all he isn't getting anything done (anything constructive).

  6. Anonymous says:

    Some of these wall street guys handle billions in trades and CEO's manage billions in sales. Limiting a salary to 1% or so of what you do is asinine. Why bother to show up for that? Would you tip your server at the local breakfast joint 1%? hell they are supposed to get 10%-20% of what they sell. The average american makes a larger portion of what they produceat work in income than 1%, all without giving up aspects of their lives that the power brokers and CEO's do. They deserve to make what they do because they sacrifice and work for it. As far as ill-gotten gains (living the high life on our dime) though, Jeff, you are spot on.

  7. Rix says:

    While I am not exactly fond of governmental takeover of the banking industry – to put it mildly – I can tentatively agree that runaway bonuses of Wall Street kingpins are not in fair proportion to their effort and/or their intellectual capacity, and something had to be done about it. Ideally, the action would have involved handcuffs and a nunch of hefty indictments for fraud, embezzlement and economical sabotage, but unfortunately, until Fed is ousted from the country's steering wheel, we cannot count on justice. As a palliative measure, I favored introducing the Swedish compensation model, in which the difference between the highest pay in the company (or any of its direct affiliates) cannot exceed 30 times the lowest. It is not a perfect solution, but a solution nevertheless, certainly superior to retroactive clawback laws.

  8. Anonymous says:

    What RIX said —ONLY applied to Congress…They're worse than the financial institutions they are attempting to regulate.

  9. matt says:

    Some great comments here already. I recall the probably the harshest resistance to any posting on here being the limits on executive pay (with the only possible exception being Al Gore's mouth as pooper).

    I don't like how they are going about this action in tax codes and government legislation. I would much rather see limits on executive compensation coming SEC. I wholeheartedly agree those who do well should be rewarded, but I don't think they deserve 90% or more of the gains from investors, which in some cases they receive. They do possess talent, but I am certain there are others who would be willing to do the same quality work for much less. I pulled my money out of the market altogether at a loss and I will not consider investing again until there is a more reasonable level of accountability wit executive compensation. What we are getting is every bit as much off the mark and I agree government should be held to the same level of accountability.

  10. Anonymous says:

    I like the phrase< "dealing with the devil has its consequences"

    It reminds me everytime I watch a movie. Always there are stupid people doing what the bad ones want and then they are always surprised when they get stabbed in the back by these bad people.

    Really, wake up and smell the coffee America!

    mmm

  11. Gail B says:

    What gets me is that the government is having authority over companies that stockholders own. We should be deciding how much we are willing to pay the executives, not an illegal immigrant!

    Also, I hear a lot of people calling in to the talk radio station I keep on. They are saying that they are, for example, in medical school but do not want to be told where they can practice or how much they will be able to make. Potential physicians are considering going into veterinary medicine instead. How many other kids in college are faced with the same dilemma in other fields?

  12. Gail B says:

    I wrote to the CEOs of both General Motors and Chrysler and begged them not to take the bailouts.

    Bet they wish now that they had listened! But "I'm a girl: I don't know nothing!"

  13. Dee says:

    Although I may not agree with the amount that some of these executives make, I feel strongly that it is none of the government's business. Most importantly, what gives the "Pay Czar" the authority to do this? He is not an elected official. How much is he being paid and who set his salary? The fact that he is the one setting limits infuriates me even more. If the government can do this to those who received bailout money who is going to stop them from doing this to any other private business? This is redistribution of wealth on a large scale. As Gail said, the stockholders should be the ones who make the decision as to how much the CEO makes. Another commented that most of those who created the problems have already left. Barney "Fwank" is waiting in the wings to set more limits. I certainly hope that those at the bottom of the ladder see a big increase in their salaries. How can we get rid of all the Czars who apparently have more power than Congress? Shouldn't the House and the Senate have some say so in this? Oh, how I hope our country survives the next 3 long years.

  14. Boston Blackie says:

    Great comments today from everyone. When you get in bed with a dog, you end up with fleas. This WH continues to move the goal posts everytime there is a stoppage in play. Robert is dead on that this is part of the WH's big takeover plan. Gail, we all wish that the stockholders would make the decisions on executives' compensation but I am the first to admit that I toss my stockholder voting forms in the shredder. But an unvetted czar who makes these decisions "without confering with POTUS" is very dangerous for us. If you believe that Obamama isn't in on this, I have swamp land to sell you.

  15. Randy Wills says:

    What a refreshing perspective on the executive compensation issue, Jeff. Thanks.

    Obscene compensation, absolutely. Incestuous agreements between financial institutions which stifle competition, undoubtedly. But that is a free-market problem -not the government's. The government's role is to enact laws to combat the excesses of human nature, regardless of the form it takes, which damage innocent persons or the nation at large. The remedy is determined by courts, following the law, not "czars".

    Once you start "jiggering" a system, which is what the free market is, it cascades thoughout the whole system. Sstem theory demands this. If the government can make ANY decision regarding management (not activities, such as pollution) of a free enterprise, it can manage every aspect of the business. It then ceases to be a free-market system. Maybe we could call it something like "Socialism".

    The "failing" enterprises should have been allowed to fail. I beleive that they weren't allowed to fail because the effect would have been greatest on the "big money" people and politicians involved. You know, that freeway of financial movers and shakers who float back and forth between Washington and Wall Street.

    The fundamental problem lies with the shareholders who refuse to take an active part in the management of the corporation in which they have invested. It's the same mentallity that drives people to complain about "jobs going overseas" and ask the government to impose trade barriers, which, in reality, are totally counterproductive. All the public has to do is stop buying products made overseas, but no; that would mean that they couldn't use price as the key factor in a purchase decision.

    Dumb sheep.

    Randy

  16. whats_up says:

    Regardless, my belief is that the free market should be allowed to work as it does.

    Jeff,

    Before I get to for into this can you clarify this statement. Do you believe that there should be no govt control over the free market or limited govt control? If limited how much and in what areas?

  17. suek says:

    News today is that the pay "czar" made this decision all by his lonesome. No input from the prez. Now….I might be mistaken, but I don't think the pay "czar" was confirmed by Congress. There's recently been some movement on this – that these people are actually "counselors", and therefore aren't making policy decisions, and therefore don't need approval by Congress.

    Think this might change some minds?

    (if you can manage to read this blog(below) – it's tough reading – you'll find a lot of info on the high probability of law-breaking – even outright fraud – by Wall street, plus the fact that nobody in government seems inclined to a darned thing about it. He also has a post about Capitol One still on the main page that you might find of interest, if you have a credit card with them)

    http://market-ticker.denninger.net/

  18. goddessdivine says:

    I smell socialism. Whatever happened to the right to life, liberty, and the pursuit of happiness? Or is that to be a thing of the past? (Kinda like our founding documents…..) Let's prosecute the 'bad guys', but let the good ones flourish.

    Robert is dead on. Salary caps chase away talent. It is also not the govt's job to stick it's nose in everything. I believe Reagan also said "Government IS the problem." Perhaps if the govt would not overstep its boundaries and let the market work itself out, we wouldn't have so many problems.

    But if we are going to talk about salary capping…..let's not stop with Congress and Hollywood. What about professional athletes? I really don't think they need multi-million dollar contracts. (And then they whine that they don't make enough.)

  19. cher-pa says:

    I feel Obama needs to hire a Hollywood Czar.If we could take 90% of their income,I bet they would change their tune real quick.the Hollywood elitists in this country make me sick!!

  20. GROUND HIM says:

    They need to take into account Air Force One fuel costs also when getting to Obamas 200,000 cutoff.

  21. BILL MAHER MAKES TOO MUCH says:

    cher-pa is right, movie tickets should be 3.00 not 10.00

  22. Anonymous says:

    How much does an obama czar make?
    Is it authorized by Congress?
    How about authorized by the Constitution?
    Who and how are they being paid?

    We know where the pay cuts need to begin, start with our corrupt government that swindled our way to this point in history.

    how about we get that $91million back from Rains, after all he admitted he cooked the books to get the bonus money? Any charges there yet? nope didn't think so.

  23. whats_up says:

    How much does an obama czar make?
    Is it authorized by Congress?
    How about authorized by the Constitution?
    Who and how are they being paid?

    Well to answer two of your questions.

    Yes this position is authorized by the constitution and no it is not authorized by Congress but it doesnt need to be. His salary is available as it is a public record and I imagine that they are paid like everyone else, with a paycheck either at the end of the month or bi-monthly.

  24. Still a Patriot says:

    What's Up -

    Can you tell me exactly where the czars are authorized in the Constitution?

    Susan

  25. whats_up says:

    Susan,

    Article 2, Section 2 states in part:

    He shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur; and he shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments

    Congress has passed laws allowing the President to do this.

  26. Anonymous says:

    I'd love whats_up's take on Article 2 Section 1 Clause 5. Mr. Genius.

  27. Gail B says:

    Whazzup–

    May I ask you one question?

    Why do you always ask for an explanation from Jeff?

    He has his plate FULL. You are one person. We regulars understand perfectly what he means. We understand that businesses, both large and small, are being snuffed out due to burdensome taxes and any penalties that Obama/Soetoro can think of.

    If Obama wanted the United States to come out of this recession/depression, he would leave the money in the hands of those who purchase goods that businesses produce. Instead, he is punishing the businesses and making them fail. The "bailouts" and "stimulus pkgs" burden U.S. citizens now and in the future; meanwhile, the Fed prints more money and devaluates the dollar.

    Now–YOU TELL US: Whiskey Tango Foxtrot!

  28. IN YO FACE WAZZUUPPP says:

    You go Gail!

  29. Gail B says:

    Thanks, IN YO FACE/ALL CAPS MAN!
    "Dealing with the Devil…!"
    (Sometimes idiots just have to have it spelled out for them.)

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