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.