Businessweek Debate Room-CEO Pay Caps

The Debate Room

Let CEOs Make Do with $500,000
President Obama’s proposed salary restrictions for banking executives are a good idea for all of Corporate America. Pro or con?

Pro: Welfare Checks for Execs
by Dean Baker, Center for Economic & Policy Research

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.


Con: An Unneeded Complication
by Yaron Brook, Ayn Rand Center for Individual Rights

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.


My Commentary

Mike Zemack
February 11, 2009 08:48 PM
On the face of it, the pay cap doesn't seem to make any kind of sense at all. At a time when top talent is needed to turn these companies around, which was the whole point of the government’s bailout "investments," these companies are denied the flexibility and freedom to attract that talent.

But viewed from the proper perspective, this does make sense. The pay cap is a government power grab. Eventually, the precedent established here will lead to greater government intrusions into all companies. As has been pointed out previously here, the pay cap is the latest in an escalating series of government intrusions into the private economy, each leading to the next. We are witnessing creeping fascism.

I agree with Mr. Brook. Repeal the cap and end the bailouts. Then abolish the myriad of market-distorting government regulations, programs, and policies that led to the crisis to begin with.


Other Commentary

random
February 11, 2009 11:49 PM
"... 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."

These CEOs ran their companies into the ground, begged the government to give them money and they should keep multi-million dollar salaries for failure?

To all those who bemoan that the banks are getting nationalized and reaching for the USSR/Cuba hyperbole, keep in mind that the banks ran to Congress, crying that they needed government help and the same regulation they described as injurious meddling. Obama didn't nationalize banks. Bush did. At their request.

If you're perfectly happy with these hypocritical "leaders" keeping $200 million pay packages and rewarding them for their failures, that's your business. I, on the other hand, wouldn't want my taxes to be paying for a generous retirement of someone who ran his bank into the ground and socialized it rather than face the music and take his lumps.

"Although not an example of LFC, the Industrial Revolution was a time during which there was very little government interference in business. The result was an overall improvement in the quality of life for all people. This country realized a surge in private wealth no other had ever known."

Really? According to whom? During the Industrial Revolution factory workers spent 10 hours a day, six days a week for almost nothing and kids as young as 6 were used for hazardous repair work. Grocery stores sold rotten food, butter mixed with mashed potatoes and tap water was better suited for biological warfare than for drinking, cooking or cleaning.

Monopolies crushed competition and the overwhelming majority of the new wealth was concentrated at the top 1%. There was no such thing as the middle class until the mid 1940s.

Unless of course you have data that contradicts every college textbook written in the last 50 years.

Finally, when using Marx or the Communist Manifesto in an insult, here's something to remember. Marx and Engels were sitting down to a cup of coffee and ranting about the mistreatment of factory workers. None of the things they outlined were supposed to come from government interference. Both of them just assumed that the changes will happen on their own.


My Commentary Response to Random

Mike Zemack
February 12, 2009 07:58 PM
Random, and apparently the college textbooks he cites, fails to consider historical context. The conditions that existed at the dawn of capitalism and the Industrial Revolution were horrendous. Unimaginable poverty, including hordes of homeless children, was the norm. Life expectancy was abysmally low, and the mortality rate for children under five years old was 70% plus.

This must be kept in mind when criticizing the allegedly terrible conditions of "factory workers [who] spent 10 hours a day, six days a week for almost nothing and kids as young as 6 were used for hazardous repair work." People filled those conditions, those jobs, voluntarily because it vastly improved their lives, compared to previous conditions.

In particular, most of those child laborers Random laments would most likely have been dead children before...part of the hordes of children abandoned by parents too poor and hungry themselves to feed all of their children. All of those people, adults and children alike, flocked to the newly opening factories by choice, because it improved their lives. I know of no historical record of businessmen forcing people to take those jobs. The rising prosperity of the 19th century capitalist economies pulled families out of pre-industrial poverty, gradually alleviating the need for children to work. Today's child labor laws that rightly protect children from exploitation were not made necessary by capitalism, but made possible because of capitalism. Had those laws existed during the early days of the Industrial Revolution, they would have condemned countless children to death by starvation.

It should also be noted that life expectancies almost doubled, from about 30 to the mid fifties, between the late 18th and early 20th centuries in the industrializing capitalist nations, an unprecedented and incredible achievement in so short a period of time. This occurred in large part because of improved living conditions for children, resulting in a sharp fall in their mortality rates. It also occurred during a period of time unlike any before or since--an almost laissez-faire economy.

As for monopolies, both practice and theory demonstrate that the kind of monopolies that "crush the competition" are a logical impossibility in a free, capitalist economy. As long as political force isn't brought into the economic equation, there is no way any company...even one that is the sole producer of a particular product at a particular time...can prevent new competitive entrants.

Take the just-announced merger between Ticketmaster and Live Nation. Despite the fact that it will initially create a market monopoly, new entrants are free to enter into the ticket business at any time, including Springsteen, LiveStub CEO Hershfield, or any of the artists and others in the ticketing industry who are squawking against the merger. If this deal is approved, as it morally should be, the combined company would still have to satisfy its customers or lose them to a new competitor. As long as individual rights are protected, as they are only under capitalism and as long as political connections aren't employed by the big established players to thwart competitors, as typically happens in the kind of mixed economy we have now competition (which includes potential competition) can not be "crushed" or coercively eliminated by anyone.

Capitalism has never had a fair hearing because it has never been fully understood, even by most of its supporters. A good place to start would be to examine the total context of the current crisis, as Mr. Brook has attempted to point us in the direction of. Even Random might be tempted to set aside "every college textbook written in the last 50 years", and think again.

One final comment. Not all of "the banks ran to Congress, crying that they needed government help..." Some, such as Wells Fargo, among many others, were forced to take bailout money by the Bush administration. Many, though, did run to the government. But keep in mind that one must not confuse capitalism with capitalists. Laissez-faire means, essentially, the separation of state and economics. Under capitalism, no bailout would have occurred, and the incompetent banks would have folded. Of course, under capitalism, we wouldn't be having this discussion, because the housing bubble would never have occurred to begin with.


random response
February 13, 2009 02:39 PM
Mike,
Really, you shouldn't make things up. To say that kids doing factory work in hazardous conditions circa 1905 wouldn't been dead instead is to use a heavy amount of artistic license about tough times in the big city and make your own version of history, more agreeable with what you like to hear. Historical context doesn't mean you get to make up something to disagree with facts you'd rather ignore.

The same goes for your bizarre concept that monopolies give room for new entrants into a market. They don't. If they did, they wouldn't be called monopolies. A monopoly owns 98% of the market or more which means that it controls 98% of the customers and close to 99% of all revenues that can be generated in the market. They can and do crush any new entrants to the field which is exactly what happened with US Steel, Standard Oil, AT&T and the other famous monopolies of the day. Your example of the TicketMaster and LiveNation merger uses customers who are forced into partnerships with the companies because they've shut out everyone else and calls them "new entrants." So if my Internet is provided by Time Warner which has a monopoly in my area and I have no choice but to go with them for Internet access, I'm their competition? Wow. Just wow.

Finally, I find it hard to believe that Paulson was shoving money down Wells Fargo's throat. Why? Because that never happened. No bank is forced to take bailout money. They ask for it in order to be eligible to receive it. It may help to actually read the news before pontificating on morality of running a monopoly. Big words and long posts by themselves do not a valid argument make.


My Response

Mike Zemack
February 13, 2009 11:03 PM
Random:

I specifically said "As long as political force isn't brought into the economic equation, there is no way any company...even one that is the sole producer of a particular product at a particular time...can prevent new competitive entrants."

There is a crucial difference between a market monopoly and a government-enforced monopoly. The cable companies are typically awarded a franchise to operate in a given geographical area--by government. This means, competitors are forbidden by law from entering into that particular market segment. Absent government interference in the market, a monopoly can be maintained only by the voluntary actions of customers willing to buy the products of that company. A market monopoly cannot forcibly prevent new entrants. Citing AT@T and Standard Oil in the same context is comparing apples to oranges. AT&T's market share was guaranteed by law (until 1984), while Standard Oil's share dropped precipitously after the Texas oil discoveries and exploding demand for petroleum products with the advent of the auto industry.

Wells Fargo was one of nine healthy banks called to Washington to meet with Paulson, at which time he "offered" a contract in which the banks must take the money as a "one-time" offer. This was understood by the banks as a threat from the entity--the government--that controls their industry. Wells Fargo immediately resisted, but ultimately signed the agreement. None of the nine banks actually asked for the money. This was reported by the New York Times and other news outlets last fall. It must be remembered that we have a centrally controlled and regulated banking industry. When the people who have regulatory control over your business demand something, you are hardly in a position to refuse. Perhaps Wells Fargo and the others could have taken the risk of refusing the money, but none of the nine banks asked for the money.

As to child labor and the other facts I cited, the source for the information I presented is, among others, the book The Capitalist Manifesto by Andrew Bernstein. And I was specifically referring to the early years of the Industrial Revolution regarding child labor, not 1905. If you can't refute some one's arguments, it doesn't mean you should accuse him of lying.