I read the other day where Kenneth Feinberg, the Obama administration’s pay czar, is planning on limiting the compensation of top employees at firms receiving large amounts of government aid. Now the initial reaction of the masses might be that this is an excellent decision. In fact, my guess is that is exactly how the majority of voters would react and, since it’s a popular decision, it makes cutting executive compensation in government-controlled firms a very easy choice.
But easy isn’t necessarily right.
Sure, you can argue that the top people in many of these organizations are overpaid. Today’s CEOs have certainly come under fire for their extravagant pay packages. Some are making millions of dollars a year while the average worker pulls down something in the mid — 40’s — that’s thousands!
But as an investor in these companies, and that’s what you and I are as taxpayers, do you want the company you own to be at a competitive disadvantage when recruiting top talent? I don’t. I want the very best people you can find to run the business that I have a stake in. So when Mr. Feinberg limits what the government-controlled companies can pay for senior executives, he’s putting the company you have an ownership in at a competitive disadvantage. That can’t be good for the long-term return on your investment.
Take for instance Bank of America where current CEO Kenneth Lewis has said he plans to resign at year’s end. BofA will be looking to fill its top post. You and I have a vested interest in making sure the person brought in is the best-qualified person to run the company. Is that going to happen when the government has placed restrictions on the compensation the bank is able to pay? Add to the lack of competitive pay the public scrutiny that comes with running a company that has been the recipient of public funds, and you’ll be hard-pressed to find anyone qualified to take the job. Ken Lewis and Edward Liddy, who runs the post-bailout AIG and has also resigned, can both attest to that.
So is limiting the pay of top executives at government-controlled companies a good thing? It may be if you’re a politician, but it’s not if you’re a shareholder.
And just so I’m clear, I’m not condoning executive compensation in most of the big companies. But I’m not sure it’s the CEO’s fault either. It’s what the market will bear. Boards of directors filled with very bright and experienced people are putting together the pay packages that attract these CEOs.
It’s not unlike the modern athlete who rakes in hundreds of thousands of dollars, even millions, per game. Hey, Brett Favre got $20 million to play two seasons in the NFL. That works out to $625,000 per regular-season game, assuming he plays in all 32 over the two seasons! The owner doesn’t have to pay that much for talent, but he determines that it’s in the best interest of the franchise to do so.
So if I offered you a five-year deal to bring your unique talents to my company at a guaranteed $5 million per year, would you turn me down because the pay is extravagant? Or would you take it believing that I must see how you could contribute to our organization in such a way that it makes the investment in you worthwhile?
My point is that, right or wrong, top executives can command very lucrative pay packages. They don’t set their own compensation. It takes two to tango. Someone has to be willing to pay them that much, or their pay demands would go unmet. So you can blame them for taking the money that someone is making available to them, but they’re only getting what the market will bear for top talent. You could argue that no one person is worth tens of millions of dollars to run a company, until the company loses billions of dollars and your investment right along with it. Then you’d be wishing they’d spent a little more to get the right person so that your investment hadn’t disappeared.