Wednesday, February 4, 2009

Salary Caps and the Brainless Voting Mob

When politicians speak, idealists like me typically vacillate between two alternatives, either the politicians is evil, or he's stupid. Rarely does an elected official say something so bashing-my-head-against-the-wall stupid that you can be sure he doesn't believe it. In that case, he's just plain evil.

I had such a moment when I read President Obama's statement that he intended to impose a $500,000 cap on executive salaries at those firms who accept "extraordinary assistance." (I'm not sure what "extraordinary" means, but that fact that any assistance is "ordinary" pisses me off.) Disregarding the utterly arbitrary nature of the $500,000 benchmark, the salary cap will be, like the upcoming stimulus package, impotent at best.

Typically, government wage control sends talent fleeing. The way that firms get around this is that they invent new forms of compensation not controlled by Uncle Sam. During World War II, in order to retain talent under wage controls, firms began offering health benefits to their employees, giving us the wonderful third-party payer system we enjoy today. (Thanks, FDR!) In the early 1990s Congress got their adult diapers in a bunch over CEO compensation (it's like crack to them) and they capped the available tax deduction of CEO salaries at $1,000,000. As a result, salaries were cut to $1,000,000 or less usually, and stock options became far more popular. Total CEO compensation skyrocketed over the years. Score one Congress.

This brings me to Obama's decision to cap executive comp. at extraordinarily bad companies. Anyone who has ever looked at a proxy statement knows that salary makes up about 5% or less of these guys' total pay. Under Obama's plan, the executive can still get stock options. Since Obama is not in a coma, he understands this. There is no ambiguity about any of this. He has to know just how pointless this measure is. If it will do anything, it might scare companies from taking more TARP money. If that happens, then I am greatful to Mr. Obama for his politicking.

In this instance, we can be absolutely sure that Obama is not stupid. Someone had to know that this measure will change nothing. It's not stupidity this time; it's just good old fashioned "voters'll believe anything we tell them" politics.

1 comment:

  1. I think Obama knows very well that this wont effect that much in the financial system, but it does do a couple things:

    1. The public is stupid, and it hates wall street. This is a PR move first and foremost, and I think it'll pay dividends in the public eye.

    2. If an employee's cash payment is capped, but his overall compensation package is constant, then these guys get paid stock options. So, while you're right in that their total pay won't be changed, their interests will align more with the company's future, which in theory could be a good thing.

    3. Haha, the stocks are basically worthless :)