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.

  • TARP comp limits: The executive summary » Hodak Value said,

    […] of the law, no one in the firm may get a performance-based bonus if the performance basis is in any way manipulable.  That immediately rules out earnings-based bonuses or most forms of profit sharing.  It very […]

  • Kat said,

    Marc,

    Thanks for continuing to write about this on your blog. None of it is surprising, of course, because congress wouldn’t know performance if it bit it in the nuts. The goal is to disassociate reward from risk and fool everyone into thinking opportunity cost is irrelevant. Only then can you hope to achieve communist “equality” along with the mass poverty associated with such distortions. Thanks for taking the time to consistently point out this idiocy so clearly.

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