Walking a Dangerous Line

Lloyd C Blankfein-$68.5 million; Kenneth D. Lewis-$24.8 million; James Dimon-27.8 million; John Mack-$800,000. These are the CEOs of Goldman Sachs, Bank of America, J.P. Morgan Chase, and Morgan Stanley, respectively-all companies that have taken significant aid from the government’s TARP program. And those huge numbers represent their total compensation packages from the past year, even as their companies posted a combined $52 billion decline in year-over-year earnings. With that kind of disparity and excess, many Americans have expressed disbelief and anger that these CEOs are being paid so much with so little apparent return to shareholders.

In response, the Obama Administration recently enacted executive compensation caps of $500,000 for all “senior leaders” whose companies take significant funds from TARP (the government’s relief bailout program). This is a well calculated political move, in that it speaks directly to the public outrage surrounding these men, but may have devastating long-term ideological and practical consequences. Are these men overpaid? Probably. But the question should not be whether or not these men are overpaid, as has been the focus of so much media and political attention. Rather, the debate should focus on who should decide the compensation packages of these men: The free market or the government? Whenever the free market collides with partial regulation, unintended consequences result.

Consider the following:

Let’s say the Baltimore Orioles, Cincinnati Reds, and Oakland Athletics all had such terrible records and attendance last year that they are on the verge of bankruptcy. Knowing that the loss of such historic franchises would greatly damage Major League Baseball and its fans, the MLB officials decide to bailout each team with a large infusion of money. The terms of the bailout, however, require that no player on any of the three teams make more than $500,000 per year. If the teams are losing so many games, and aren’t generating revenue, why should any of the players make a fortune? Consider also that the average salary for a top MLB player is approximately $5 million per year. The next season, all of the teams’ top talent come up for free agency, and leave to go to other teams in the league that can pay them their true market value. The three bailout teams were already terrible-now their best players have left to go to teams willing and able to pay them. Soon after, with continually poor records and declining fan bases, all three teams fold.

Limiting executive pay sounds like a great idea on paper, but in the end it sets a dangerous precedent, and only further hurts struggling firms. We are already seeing this with TARP companies. AIG, for example, has seen a well documented outflow of its senior talent to competitor firms, and is now struggling to weather the crisis. This pattern will repeat again and again if applied. Whether it is human talent or industrial goods, the market will always guide the greatest supply to the greatest demand.

This is not to mention, of course, that CEOs all answer to a board of directors and a mass of shareholders. If they want to compensate their leaders at such high rates, it is their choice. If an owner of a baseball team wants to pay a player a huge salary, even overpay him, it is the owner’s choice. If the fans don’t like it, they can stop going to the games. If the shareholders don’t like it, they can sell the stock or elect a new board of directors.

Finally, it has become popular to say that since taxpayer money is funding these men, the government has the right to intervene. But that’s simply not true. Taxpayer money is funding the capital, credit, and toxic assets on the books of these companies, not employee salary. And if we are comfortable saying the CEOs are overpaid, what about the mid-level manager who makes $100,000 a year and is also seemingly under-performing? Should we slice his salary in half? I certainly understand and share the outrage at the excess-especially with $80,000 office rugs and multi-million dollar private jets-but we walk a dangerous line when we want the government to control company spending.

We can debate the merits of each leader, and chronicle spending indiscretion endlessly. But the fact remains that unless you impose a nationwide salary cap, the merits of which wilt under any capitalist consideration, the plan will only hurt shareholders, and eventually the country.  It is not for us or the government to decide what these men should be paid. Is the public outrage justified? Yes, but it is misplaced. If you think these men are overpaid, blame the board of directors and the shareholders that elected them, not the government.

-Matt Benchener from TruPolitics.net