Column
The Obama Compensation Limits: FreePassers Not Allowed
President Obama announced that he wants to impose compensation limits on executives of companies that receive government financial rescue funds. His proposal includes the following provisions:
- A $500,000 cash cap on annual compensation for senior executives
- Requiring top executives at financial institutions to hold stock for several years before they cash out
- Requiring nonbinding “say on pay” resolutions giving shareholders more say on compensation
- Bonuses can be clawed back if these executives provide misleading information
- No golden parachutes upon severance
- Companies must disclose perks such as jets and entertainment junkets
These provisions would apply only to firms receiving government funds and would be applicable until they are repaid to the government. This policy is clearly designed to mandate controls over FreePassers.
As a corporate executive, if you went to a private organization for money to assist you with a cash crunch and potential insolvency, they would require similar if not harsher terms for access to capital. Take Warren Buffett’s investment in Goldman Sachs for example. If the government is exercising similar prudence and responsibility for taxpayer funds, it appears quite logical that similar restrictions should be imposed.
President Obama said, “This is America. We don’t disparage wealth. We don’t begrudge anyone for achieving success. And we believe success should be rewarded. But what gets people upset-and rightfully so-are executives being rewarded for failure, especially when those rewards are subsidized by U.S. taxpayers.” I wonder if President Obama has been reading my blog!
Some experts are claiming that executive talent will depart these companies as a result of these limits to their earning potential. However, this does not restrict long-term rewards, only short-term payouts. Executives who believe in the long-term success of their companies will still do very well if they perform. They merely have to put their own financial upside on the line along with everyone else. If not, they are FreePassers, and keeping them around is more of a liability than an asset.
Tags: account, compensation limits, reward success, Warren Buffett
February 9th, 2009 at 3:00 am
Doug,
I agree that it is fair for the government to negotiate the terms of its investment in any company that receives TARP funds. Any private investor would negotiate interest rate (or preferred dividends), repayment dates, and especially financial covenants and provisions regarding use of funds. Especially in these times, it is fair for the investor of last resort to impose some structure and limitations on senior executive compensation. However, a flat, uniform ceiling on cash compensation might be too much of a “one size fits all” solution. Some flexibility or proportionality, such as making the pay ceiling proportional to the amount of assets on the balance sheet, profits, overall compensation expense for the institution, or average salary for the institution, might be warranted and would allow the larger, more troubled institutions to compete with smaller, less leveraged institutions.
Moreover, the larger, overall theme of your blog is apropos. It’s time for senior members of our institutions, whether private or public, government or commercial, to start taking responsibility and showing some leadership.
February 17th, 2010 at 5:18 pm
If the economy turns up, the government stands to gain due to increased tax revenues. The people can figure on another seven years of famine, though.