As support begins to wane for the stimulus package, the political battle continues. The fact that some of the previous cash handouts went to companies who paid fat bonuses certainly has not helped the general view of such plans. As such, it is hardly surprising that Obama has said that a limit should be placed on executive compensation when a company accepts bailout money.
On the face of it, this seems reasonable. After all, a company has the choice between accepting the money and allowing limitless compensation. If the company accepts the federal money, they certainly need to play by the rules set by the government. Further, the purpose of the bailout money is to (in theory) revitalize the American economy and not to enable executives to increase their already substantial personal wealth.
Interestingly, some people have argued that imposing such limits will be harmful to the recovery. The argument, which has a degree of appeal, is roughly as follows: If a limit is placed on compensation, then troubled companies cannot retain or acquire top talent. If a troubled company lacks such top talent, then it will continue to sink deeper into trouble. In contrast, if a company is able to keep or acquire top talent, then the company’s chances of recovering are better. As such, companies that receive bailout money should be allowed to keep their compensation unlimited by the state.
There are, of course, some obvious concerns with this. The first is an ethical one. Given that the economy is spiraling down and jobs are being lost, it seems rather selfish of executives to desire such extravagant compensation. While $500,000 might not seem like much to a top executive, that seems to be a rather adequate amount to live on and would impose no meaningful hardships. True, they have no doubt grown accustomed to a rather luxurious lifestyle, but this is a time for sacrifices. Suppose, for example, a CEO is now making a modest $5 million a year and this is trimmed down to $500,000. The $4.5 million could then be used to hire workers (or hire back workers who have been laid off). A little math will show just how many average paying jobs ($30,000-60,000) that money could create. And, of course, these workers would be spending money rather than getting unemployment.
Second, there is the concern about the “top talent.” The big companies that got the world into this mess were led byjust such “top talent.” As such, this raises important questions about the quality and desirability of such “top talent.” Perhaps it is time for some new people.
Third, the cost of sustaining such “top talent” certainly puts a strain on struggling companies. If such people do earn the company significantly more than what they are themselves paid, then their compensation would be justified. After all, “Joe Worker” is expected to earn the company more than he is paid and the same should be true of executives. I often wonder whether such executives could possibly generate that much wealth for the company through their efforts alone. Perhaps they do. Perhaps not.
Fourth, while it is reasonable to argue that people who can make more elsewhere will go elsewhere, this does raise some interesting issues. Obviously, people are influenced by money and the argument in favor of unlimited compensation is that a company will need to offer top money to draw “top talent.” This, of course, assumes that people are primarily (or perhaps even solely) by money. It also assumes that the “top talent” expects top compensation and that such people will not sell their talents for anything less (or else).
While the idea that people have to be offered vast sums of wealth to be motivated to take a job has some people, it is obvious that people will work very hard for much less. For example, think of the typical worker-they go to work and generally work hard for far less than what an executive makes. Of course, it can be countered that “Jane Worker” lacks the “talent” to command vast compensation.
However, very talented people do chose jobs and professions that pay far less than they could make elsewhere. For example, many people in education and public service could make considerably more money doing other things. However, they are motivated by other factors such as a desire to help others or to serve the public good. Unless it is the case that executives are simply driven by a desire for selfish gain, then it would seem that “top talent” could be motivated by other factors to aid failing companies. For example, they might be motivated by loyalty to the company or a desire to keep it running and employing people.
In fact, given that the desire for excessive gain helped bring on the economic disaster, it might be better for companies and the world if the folks in charge were not driven by a desire to achieve excessive compensation. Rather, it might be better to have people in charge who are concerned with running a company responsibly and keeping people employed.
As such, the limits on executive compensation seem reasonable.