NCPA - National Center for Policy Analysis


October 27, 2009

It is typical of the government to over-react by responding to controversies with an overbroad, one-size-fits-all mandate, as is the case with the current response to controversies over big bonuses at a few banks and insurance companies, says the Heritage Foundation.

For example, the Federal Reserve Board has now issued a pay policy that effectively punishes lower-level employees at every bank in America for the excesses of Wall Street execs.   As the Wall Street Journal puts it, small town bankers are having to pay for the sins of the big banks.  The government fix will not work, and it punishes the wrong people.  The government rules will hurt the whole banking sector, and they still will not stop unscrupulous executives from taking outsized pay by skirting whatever rules the government devises, says Heritage.

The government has tried three times in recent decades to limit executive pay and each attempt backfired, says Heritage:

  • In the 1980s Congress limited "Golden Parachutes" because of public outrage at a few outrageous examples of executives at merged firms getting outsized payoffs. The result of the regulation, however, was to legitimize the once-rare practice until 70 percent or more of CEOs had such agreements.
  • In 1992 the Securities and Exchange Commission required companies to compare executive pay to "peer" corporations. Since everyone thinks they are above average, executive pay rose, especially for the lower half of executives.
  • Then, in 1993 the Clinton Administration capped tax deductions for compensation at $1 million, and effectively insisted that compensation above that amount be paid in stock or options; as a result, when the stock market boomed in the 1990s and again through most of this decade, executive pay skyrocketed.

The problem is that government pay controls cannot fix the problems, and they often make things worse, says Heritage.  The culprits in the current pay controversy are top executives at a few large banks and insurance companies bailed out by the government.  The alternative to the government bailout was bankruptcy, and the executives likely would have lost their jobs and their fancy pay packages.  Most of those folks now have salaries controlled by the government Pay Czar.  Stringent pay caps will not work either:  executives simply leave the firms, which are now having trouble hiring qualified replacements. This is one more reason why the bailouts were a bad idea.

Source: Dave Mason," More Bad News on Pay: Government Aims at the Wrong Target," The Heritage Foundation, October 23, 2009.

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