Executive Pay Politics

Executive Pay, particularly on Wall Street, is a hot button topic that easily gets the emotions going on Main Street. Considering the pay packages for Wall Street executives such as Dick Fuld of Lehman Brothers, (who earned on average in excess of $40 million a year over a six year period preceding his company’s collapse) much of this ire is well deserved. Few rational compensation experts would argue the compensation setting process is not broken and in dire need of correction.

Such a situation is ripe for political opportunists to gain favor with the public by speaking out against this evil. On February 4th, President Obama announced new pay restrictions on executives at banks that receive “exceptional assistance” from the government. (Days earlier it was reported Merrill Lynch had sped up bonus payments exceeding $3.6 billion just weeks after the firm received significant infusions of tax payer money). Under Obama's plan, companies that want to pay their executives more than $500,000 will have to do so through stocks that cannot be sold until the companies pay back the money they borrow from the government. However, within hours of the announcement, commentators pointed out clear loopholes and shortcomings in Obama’s pay restrictions that rendered the plan almost useless. (See “Loopholes Sap Potency of Pay Limits”).
Let there be no confusion here. Obama’s plan was not carelessly put together. It was not poor, hurried drafting that left these loopholes. Rather, the restrictions were carefully crafted to be more or less ineffective. It was essentially a political statement that the President is in touch with the people and that he also condemns the lavish Wall Street pay days. It was rhetoric to please the people while not really doing anything to alienate or upset Wall Street.

So it was not surprising that the Obama administration opposed the much more biting restrictions Senator Dodd included in the final version of the stimulus bill. (See Bankers Face Strict New Pay Cap). In contrast to Obama’s, these pay restrictions are effective retroactively and have the ability to apply to a substantial number of firms where Obama’s plan would have applied to exceedingly few if any.

In Obama’s defense Senator Dodd’s restrictions are misguided and overbearing. Not that the pay system at financial institutions as well as most other companies does not need fixing, but as the President knows, this is one of those things much easier said than done. A strict pay cap is perhaps one of the worst ways to correct the underlying problems that ultimately led pay practices to where they are today. The true solution lies in correcting the compensation setting process. That is in: increased director independence and accountability to shareholders, increased disclosure requirements that make it clear to the board, shareholders, and regulators precisely how much executives are being paid (as recently as 2005 less than 10% of companies used any form of tally sheet to sum up all of an executives compensation and those that have moved to a tally sheet have been surprised at just how much their executives actually make when including options, perks, deferred compensation and SERPs), and far less reliance on compensation surveys that are completely inflated by years of bad data.

The point is, as it always is, that the truth lies in the details and not in the rhetoric of politicians even that of the rock star President Obama (currently enjoying approval levels twice that of Congress). Like his pay restrictions, I fear his stimulus package promises far more than it will deliver, that its true impact today lies in the increased size and power of the federal government and that the most lasting economic impact it will have will not be felt even during his term in office, but will be a weight borne by this nation’s youth.