Executive Compensation

I hate the idea of salary freezes.  In one sentence:

If you freeze salaries, then only the people who don't deserve a raise get the raise they deserve. 

Everyone else gets less, and the discrepancy is widest for the most productive people.  Who decided this was an effective personnel policy?  Why is it that when institutions are strapped for cash, they pay less attention to how they allocate their resources?  When cash is scarce, we should spend our money more intelligently.  What is intelligent about a compensation policy that fails to differentiate based on performance?  Reduce staff.  Set the baseline raise at a negative number.  Do something, but don't force those who merit additional compensation to subsidize those who don't.

Here's the relevance today.  The first two paragraph's of Scott Wilson's Washington Post article on the freeze on bonuses are these:

Last week, the Wall Street Journal reported that "[m]ajor U.S. banks and securities firms are on pace to pay their employees about $140 billion this year."  Referring to their appearances on yesterday's talk shows, the Washington Post headline today is that "Top aides to Obama upbraid Wall St." for bonuses after bailout.  Look folks, you reap what you sow.  If you don't like your current predicament, consider the alternative paths that we -- you, me, the Bush administration, everybody -- could have taken to our present position.

Courtesy of the Associated Press, in its coverage of President Obama's latest proposals for limiting top executive compensation at firms receiving government assistance, we discover Representative Barney Frank's left hand not knowing what his right hand is doing:

To Rep. Barney Frank, the chairman of the House Financial Services Committee, Geithner's plan doesn't go far enough.

"It is not the government's business to discourage risk taking," said Frank, D-Mass. "But neither should we allow systems which have existed up until now whereby decision-makers are handsomely rewarded if they take big risks that pay off, but suffer no penalty whatsoever if those risks result in losses to the company."

Rather than linking to it, reprinted below is the president's full statement on executive compensation from Wednesday.  It's well worth a few minutes of your time because it may well be one of the strongest pro-American statements about the U.S. economic system made by any president in decades.

There are three things I find most striking.

First, you can't help but be impressed by this:

"This is America. We don't disparage wealth. We don't begrudge anybody for achieving success. And we certainly believe that success should be rewarded."

That very succinct (23 words) caputures the American economic dream completely.  My guess is that every small business owner who read or heard it was cheering.

Then there's this, which followed immediately from the three sentences above:

"But what gets people upset -- and rightfully so -- are executives being rewarded for failure..."

Finally, there's this, which ended the sentence above:

If the government is going to put taxpayer money into distressed firms, then it has the obligation to regulate every way that money leaves the firms before the taxpayer money is repaid.  That includes dividends, large purchases, executive compensation -- everything.  The government may decide that it is not feasible or constructive to micromanage the firms, but that is a decision it should make deliberately.

For me, the key word is "if."  I think that the appropriate policy response is bankruptcy, not bailout in lieu of bankruptcy.  In bankruptcy or liquidation, the question of whether the executives are being paid too much is moot.  In bankruptcy, equity holders are wiped out and management goes with them unless the new owners -- the former creditors -- specifically wish to retain them.  If they make that choice, then they should be able to pay the executives whatever they deem appropriate.  Likewise if they hire new managers.