Loopholes, Lawyers and Obama’s Executive Compensation Cap

Posted by Bridget Quigg

President Obama’s recent work to limit executive compensation makes my heart sing – or at least hum a bit. Like most Americans, I am shocked and scared over what’s happened in our country, and I cling to signs of hope. President Obama’s recent push to limit executive compensation sounds like a something worth clinging to. But, I’m worried about what sort of results it will really have once Wall Street’s lawyers get a hold of it.

According to a recent L.A. Times article, "Wall Street Finds Ways Around Executive Pay Caps," Obama’s plan puts a $500,000 limit on annual executive compensation, reins in executive severance packages - a.k.a. "golden parachutes" - and requires that typically lavish parties are kept in check for all companies receiving bailout money.

Why is limiting executive compensation so urgent? Because some undeserving people just got away with your tax money last year. Did you know that, according to that recent L.A. Times article, companies receiving bailout funds from the Bush administration spent $20 million of that precious federal tax money on executive bonuses? No schools received new computers; no potholes were filled. $20 million for executive bonuses! Was this just to ensure they could talk business over a round of golf and keep their third homes? Executive bonuses!

So, we definitely have a problem of wasted dollars. But, can a government policy fix it or are we up against too strong a force: human nature? According to that same L.A. Times article, in 1993 President Bill Clinton’s work to limit executive compensation, by limiting the amount of money a company can deduct in salary for top executives from their taxes, only backfired. Companies adjusted by handing out more stock options and executive compensation skyrocketed as a result.

Plus, according to a podcast by AFL-CIO Secretary Treasurer Richard Trumka, the increased stock options for executives only caused execs to drive up stock prices through unethical means (subprime mortgage crisis, anyone?), sell their shares and run - leaving an economic mess that we may not have enough brooms to sweep up. President Clinton didn’t exactly help us get executive compensation under control. Human nature: 1. Government: 0.

So, what will actually work to cut wasted tax dollars on executive compensation?

This is a tough question to answer, since Wall Street lawyers make more in one hour to get around government regulations than many Americans make in a week. The government is at a disadvantage here and, despite any noble efforts, may end up making future messes even worse.

Obama’s plan makes a good effort in the right direction but there are some red flags, according to a recent Slate article titled, "Obama: No More Mr. Nice Guy." First, mid-level Wall Street workers will still be allowed to bring home multi-million dollar bonuses. And, limiting compensation at companies that need top talent right now could slow their efforts to bounce back financially.

The issue is terribly complicated. For now, I’m clinging to hope and looking for a good result from Obama’s executive compensation cap. One thing I am confident about and can leave you with is a statement from Obama quoted in Slate, "This is America. We don't disparage wealth. … But what gets people upset—and rightfully so—are executives being rewarded for failure."

Here, here!

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• CEO Salaries: What is the Average Salary of a CEO?
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Comments

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[Govindan]

Executive Compensation Cap has some red flags to check.

[Brian]

So, when Bill Clinton interferred in the private sectar and limited executive compensation (and didn't by-the-way limit Hollywood actors that make $20 mil per film, or professional athletes) in your words it "backfired". What is your solution? More government interence!

Why not look at a solution that included undoing the misguided policies of the Clinton Administration since as you admit, it was better before.

Why is only government can fix problems that government causes in the first place with more government.

[Bridget Quigg]

Brian,
I hear you. The amount of government involvement in executive compensation and the quality of its results are both unsettling.
I don't believe that government can fix many problems at all. It simply isn't quick, efficient or personally invested enough in each person or company's everyday workings to help. I don't disagree with you. I wondered why Clinton's policies haven't been undone, as well.
You're right. We just pile more policies on to fix previous policies. That's what I'm saying. How will Obama's plan really work out and what sort of messes might it create? Only time will tell. But, based upon history, it's likely to wreak some sort of unpredictable havoc. Perhaps failing companies will simply totally bottom out without top execs to lead them. Top execs like to be well paid.

[Brian]

Bridget,
Thank you for your kind reply. Let's hope together that the economy gets turned around.