Would Congress put the entire economy at risk over a few guys getting paid too much?

Posted by Marc Hodak on September 24, 2008 under Executive compensation | Read the First Comment

OK, it’s an increasingly debatable point that the Paulson plan will actually save the economy. But given the market’s reaction, it seems that about a trillion dollars is at stake over coming up with a viable solution to our credit crisis, and various Congressman are willing to hold it up over…a few million of CEO pay.

That’s right, our inept Congress is trying to balance a duck against a building, and call it statesmanship. Actually, what they’re doing is playing chicken with the White House in a game of brinkmanship. Their specific proposals show how truly cynical these populists are:

– Congressman Barney Frank (D-MA), chairman of the House Financial Services Committee, wants the government to restrict the bailout to firms that deny their top people golden parachutes. He probably knows that most of those pay features are contractually obligated. That means he knows that the shareholders will end up losing almost as much fighting to keep those sums as they would otherwise pay out. And they would likely pay them out anyway. Because you see, dear Congressman, in this country the government still does not have the authority to abrogate contracts by fiat.

Frank also wants to institute a “clawback” rule to revoke bonuses paid for “bogus gains,” which will more likely create bogus litigation whose costs far exceed anything the shareholders could hope to recoup.

– Sen. Max Baucus (D-MT), chairman of the Finance Committee, is proposing tax penalties on the compensation of top executives who earn more than the U.S. president ($400,000). That’s right, for every dollar that the shareholders pay to attract a person capable of running their complex, multi-billion corporation above the wage of your average division head, those shareholders will also pay the federal government an additional 35%. Mr. Baucus may be fool enough to think that the executives will be paying that tax, but then again, he may not care, as long as he ends up with the taxes for his committee to fritter away on the next fiasco.

Rep. Jack Kingston (R-GA) says, “Clipping executive compensation is easy right now — everybody wants it.” And, of course, anything that people want, Congress believes it can do with a magic wand. Like fix the economy.

Many of these public servants are making these proposals under the misimpression that lazy, stupid, or corrupt boards are giving up shareholder money beyond reason or obligation. They believe that most of these CEOs are being treated differently from their rank and file. No, Mr. Frank, we don’t take back lawfully earned income from people when they exit a firm. No, Mr. Baucus, the shareholders don’t appreciate a hidden tax increase as a result of misguided attempts to have them pay their senior officers like civil servants.