Congress prohibits pay-for-performance

Posted by Marc Hodak on February 16, 2009 under Executive compensation, Politics, Stupid laws | 2 Comments to Read

There are so many wonderful features of the executive compensation provisions of the new gigatera-spending law that I have to post them one at a time to avoid TLDR from my fans.  One of my favorites is the effective elimination of pay-for-performance as a viable basis for rewarding employees.

Actually, the law reads “…each TARP recipient shall be subject to…a prohibition on any compensation plan that would encourage manipulation of the reported earnings of such TARP recipient to enhance the compensation of any of its employees.”

Let’s see if we can get this straight; in golf, the score is the number of strokes one takes to get the ball in the cup.  Does compensating one based on this standard encourage cheating?  How could it not?  So, if golf were under TARP, the number of strokes would be forbidden from being used as a standard for rewarding any player.  Under TARP, film talent would be forbidden from getting compensation based on net profit (a.k.a. monkey points, a notoriously manipulable figure).  Under TARP, paying patients based on the care provided would be illegal.

I could go on, but the bottom line is that any bottom line serving as a basis for pay is a bottom line begging to be manipulated.  An incentive to perform is indistinguishable from an incentive to cheat.

The tightest interpretation of this rule would imply that a company can’t use GAAP earnings as a basis for pay-for-performance, which would be bad enough.  But any driver of GAAP earnings–revenue, cost control, inventory turns, etc.–could easily fall under the purview of this law.

So, TARP recipients be warned:  pay-for-performance is now illegal.