The New York Times reported last week that President Obama and Treasury Secretary Timothy Geithner '83 will propose amendments to executive compensation packages for companies receiving government aid, which include the likes of Citigroup, Bank of America, Chrysler, GM and AIG. There have been reports that Obama and Geithner plan to limit executives' annual salaries to $500,000. At first glance, this may seem like an appropriate and long-overdue punishment for the excesses of the financial companies that are largely responsible for the ongoing recession.
Understandably, many taxpayers are infuriated that millions of their tax dollars are going towards the top executives of these ailing companies during these tough economic times. With everyone being forced to survive with less, it becomes easy to target and criticize those at the top. But what many people must realize is that those responsible for causing this financial crisis have since "stepped down," and snatched their lavish golden parachutes on the way out. The executives guilty of making the reckless and costly decisions are out, and are no longer making decisions.
Thus, the current executives tasked with the near-impossible undertaking of nursing their mammoth companies back to health are now the ones suffering the punishment rightly deserved by those already out the door. Capping their salaries will inevitably reduce their incentive to perform. Americans need the most talented, intelligent and experienced people in these crucial top positions, but instead of attracting those most qualified for the job, these new compensation rules will deter them. Bottom line -- a $500,000 salary will bring $500,000 worth of performance almost every time. And, plain and simple, these troubled companies need multi-million dollar performances -- now more than ever.
Many proponents of the new compensation restrictions point to the relatively low presidential salary as an example of how Obama-like talent can be attracted without a salary of millions. This notion fails to account for several obvious considerations. Firstly, the keys to the most desirable mansion in the country (i.e., the White House) are thrown in as a perk of the job of the presidency. So are unlimited limo rides and jet travel. Gourmet meals are complimentary. For four solid years, the President of the United States does not have to worry about paying a dime for food, official transportation or a place to stay. Accounting for the travel, lodging, dining and security costs associated with being President, Obama's salary is in the millions of dollars, as it should be. I, like any other American, want the leader of the greatest country in the world to be the best-housed, best-clothed, most well-fed and well-protected person in the world. So comparing the salary of the U.S. President with those of the top corporate executives is just silly. Ask any of these top executives, and I am sure they would gladly accept a $500,000 salary, if they were given comparably plush housing, dining and travel stipends.
Banks are already dodging the government's efforts to micromanage their operations. Bloomberg reported that Goldman Sachs CFO David Viniar has expressed the bank's desire to repay the $10 billion it received from the Treasury last year. What may seem like an outward sign of improving financial health could actually be a desperate play to distance themselves from the crippling constraints tied to the acceptance of government money. Who knows whether Goldman is healthy enough to operate efficiently and profitably without government aid, but given the way the government plans to obliterate the incentives that draw financial talent to Wall Street, banks may be inclined to refuse aid, even when they truly need it.
It is clear that the cap on executive pay is mainly a political ploy to appeal to the emotions of the common taxpayer, in order to win as much public support as possible before the Obama administration begins to pour an unprecedented amount of American tax dollars into fixing the perceived problems. I am impressed with Obama's efforts in taking quick and decisive action in response to the fast-declining economy, but strangling the salaries of the corporate captains responsible with steering their vastly important companies to calmer waters is not a sensible solution.
