Politics of Envy
No doubt many will cheer executive pay cuts ordered by the Obama administration at companies that received U.S. bailouts last fall, but the celebration will prove short-lived. Obama pay czar Kenneth Feinberg, who has unprecedented authority to dictate pay in the private sector, has told executives at seven companies that their paychecks will be cut by 90 percent this year. In lieu of cash, the top 25 executives at American International Group (AIG), Bank of America, Citigroup, Chrysler, General Motors, and the financing arms of the two car companies will receive restricted stock in their companies, most of which they can’t touch for years. On average, their total compensation will drop by 50 percent.
So what’s the problem with the administration dictating deep pay cuts for a few fat-cat corporate types, especially those whose jobs might not exist now if the taxpayers hadn’t rescued the companies they work for? These guys having been making what seem like obscene amounts of money for years. And now that taxpayers are footing some of the bill, why not use the opportunity to roll back pay? But as natural, and tempting, as these sentiments might be, acting on them will be a bad bargain for Main Street as well as Wall Street.
If Americans are ever to recoup their investments, we must have the best available talent to return these companies to profitability. Like it or not, that usually means paying top dollar, not punishing the people who will get the job done. And drastically cutting pay will likely lead to an exodus in talent — not only at the very top, but in the layers underneath where much of the work gets done.
Why would a chief financial officer at a major bank stick around when he’s just seen his actual paycheck reduced by 90 percent, even if he’s promised long-term incentives in stock, since those incentives, too, would be less than he formerly made? He could probably walk out the door and sign on with another company or get a partnership in an accounting firm that would pay him far more — and without the hassles and insults. And last I checked, even well-paid indentured servitude was outlawed by the 15th Amendment. Though, who knows, the Obama administration may seek to amend the Constitution to punish executives at companies the feds now virtually control.
The populist zeal to seek revenge on those who make a lot of money is targeted almost exclusively at corporations. I haven’t heard outcries about Hollywood actors who make millions per film, even when those movies are a bust at the box office and the talent at issue has none. There’s no outrage over athletes like New York Yankees third baseman Alex Rodriguez’s $33 million salary or Celtic power forward Kevin Garnett’s $25 million. Nor should there be. These are exceptionally talented individuals whose teams’ owners think they’re worth every penny.
And that’s the point. In the private sector, the people whose investment makes an enterprise possible call the shots. In corporate America, stockholders elect boards of directors to make those decisions. Those boards are coming under increasing pressure to reign in pay, especially if it is not aligned with shareholders’ returns. Full disclosure, I know because I sit on boards of two large, publicly traded companies.
Citigroup, GM, and some other companies who are in the Obama administration’s bull’s-eye are now owned, in part, by Uncle Sam — which is why Feinberg can mandate pay changes. But doing so punitively, or to satisfy opinion polls, won’t help taxpayers see their money repaid. Indeed, the companies who have already paid back the Troubled Asset Relief Program money they took were able to do so because they turned a profit, in no small part owing to their ability to reward and keep talented executives. J.P. Morgan Chase, Goldman Sachs, and several other banks repaid TARP funds in June — and, in some cases, paid hefty dividends, too. But they also paid big salaries and bonuses.
There is no question that executive compensation requires scrutiny and supervision. The question is: Who should be doing it? American capitalism has created enormous wealth, not just for those at the top but for the country as a whole over decades. But in the last couple of years, many Americans have seen their own wealth diminish, so it’s natural they’d begrudge others who seem to still rake in lots of money. But the politics of envy won’t make anyone wealthier — and they could well make the country, not just a handful of highly compensated executives, a whole lot poorer.