The Government & CEO Pay

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The Swiss have taken another step to control executive pay. The drumbeat for similar action in the U.S. continues (see http://online.wsj.com/article/SB10001424127887324678604578338171658493636.html). Don’t be surprised if the President follows suit as part of his ongoing anti-corporate agenda.

I don’t expect Obama or the Democrats to propose a strict pay limit, however. Proponents of government pay controls rarely seek to limit compensation directly, lest they appear harsh and unreasonable. They prefer indirect approaches, such as requiring firms to pay an extra tax for salaries above a level deemed “fair” by the government elite, or prohibiting certain types of bonuses or benefits, or allowing shareholders to vote on pay levels set by their elected representatives (the board). Such proposals sound like reasonable compromises to uninformed voters, but they achieve the same ends–government control of free enterprise.

The case for regulating CEO pay is a weak one. Most typical left-leaning voters struggle to move beyond the notion that high pay for executives “just isn’t right.” When pressed for a more substantive response, pundits and academics often couch their arguments in intellectual jargon or vague philosophies, such as a demand for “distributive justice” (i.e., the market isn’t fair in determining who gets what so the government must step in), or the greater need for these extra funds in areas such as poverty alleviation and education, or the notion that an executive should only make X times what the lowest paid worker in the firm makes. Of course, these arguments fall apart under scrutiny. If the government is more effective than the private sector at resource allocation, then why are nations like North Korea, Cuba, and Venezuela failing economically? Posing rational questions like this do little to sway public opinion because the anti-CEO rhetoric is based in the emotion of greed.

All of us might agree that a CEO doesn’t “need” $50 million to live a good life, but that is not the point. Private property should be private. It’s not the government’s business how much a CEO earns, even if it does appear to be too high. If you own shares in a company and don’t like the executive pay levels, then you can elect a new board to represent your interests or sell your shares. If you’re not a shareholder, then you can choose not to buy the company’s products or services. Otherwise, it’s not your business.

Unfortunately, most Americans have accepted the idea that private property is not necessarily private if society (AKA, government) objects. Whether it’s wealth redistribution or the abuse of eminent domain, they seem to willing to negotiate what is really private, especially when the property in question belongs to someone else. Government regulation of individual compensation levels is just another step in that direction.

5 Comments

5 Comments

  1. taylor  •  Mar 11, 2013 @5:36 PM

    Taxpayers spent more than $1 billion last year for Obama’s personal travel. Isn’t this excessive?

  2. aliza  •  Mar 11, 2013 @7:17 PM

    Government should not intervene in this matter, but perhaps firms should start rethinking executives’ pay policy. The theory suggests that high compensations for the CEO will align management’s goals with those of the shareholders. But what if the CEO is highly compensated and shows poor results? Is it fair for the shareholders? Is it a good use of the firm’s resources? Yes, the board can fire him, but then he will leave with a golden parachute in a shape of more stocks in a value of a couple of million dollars and other benefits.
    Consider the case of JC Penny’s new CEO, Ron Johnson. According the WSJ’s article from 2/25/2013 (see: http://online.wsj.com/article/SB10001424127887324338604578324431500236680.html)
    when Johnson arrived to JC Penny from Apple, he received more than $52 million in stocks to compensate him for what he left in Apple. However, since the implementation of his new pricing strategy (fair and square every day prices, no coupons) JC Penny’s sale fell by 23% -30%, depriving the firm of $2.7 billion in revenues. Between 2011-2012 the firm’s market share market share fell from 12% to 9.1%, while competitors (Macy’s, Kohl, Dillard’s, Belk) increased their market share.
    I bet that when JC Penny’s board will replace him, he will not leave without a parachute. Otherwise, oh, no, he might crash, and this is not how the good old boys behave.
    How wonderful life is when you are a CEO.

  3. whip5  •  Mar 12, 2013 @11:42 AM

    Someone has to decide when enough is enough. Can’t we just agree that 10 million is enough and set the cap there? Isn’t that high enough for the rich republicans?

  4. PhilCapps  •  Mar 13, 2013 @1:39 PM

    Hey whip, someone already done. They’re call the board of directors. They’re elected by the shareholders.

  5. Jeff  •  Mar 13, 2013 @3:16 PM

    I would like for all the uber rich hollywood stars, news media, professional sports and business executive liberals to go first. You know – all the Democrat Obama supporters like Oprah, Matt Damon, George Clooney, Google execs, all the Wall Streeet Bankers now in the Treasury Department. Take a volunteer pay cut. I think you will quickly find Whip that $10 million is not enough for them.