Government-Dictated Pay (2009 Nov)

by Barry A. Liebling

Normally the government should have nothing to do with deciding how much a company pays its executives. Normally compensation ought to be the exclusive business of employees and the private owners of a company. But some circumstances are not normal. Sometimes the heavy, dictatorial, visible hand of the state can be a valuable learning experience.

In October 2009 Kenneth Feinberg, the pay czar responsible for overseeing companies that have been bailed out by the federal government, announced that he is drastically cutting the compensation of top executives in seven firms – AIG, Bank of America, Citigroup, General Motors, GMAC, Chrysler Group, and Chrysler Financial. Mr Feinberg’s job is both to supervise the dollar amounts received by the highest paid employees and to assure that the “right” compensation structure is in place.

The same week, and not by coincidence, the Federal Reserve proclaimed that it will review and approve the compensation plans of executives of all the banks it regulates – that is, banks that were not bailed out by the government. The goal, according to the Federal Reserve, is to use its regulatory power to discourage financial firms from engaging in practices that are too risky.

The Federal Reserve move is outrageous and ought to be vigorously opposed by the affected financial institutions and by anyone who appreciates the merits of free markets. The Kenneth Feinberg action, however, makes sense as an object lesson.

Mr Feinberg has been criticized by many pro-business commentators as intervening too much and as not helping the prospects of the affected firms.

Some have complained that the government should not meddle with the management – including compensation policies – of private companies. But when the government bailed out the seven firms it became a part-owner, which means the companies are no longer private. The “rescued” firms’ current status is what interventionists fondly refer to as a private-public partnership. The government, as part-owner, has every right to micro manage them.

And the fate of firms where the government has equity is not likely to be prosperity. The track record of government-controlled businesses is consistent. Think of Amtrak, USPS, Fannie Mae, and Freddie Mac – all money-losers. The best possible outcome for a bailed out firm is for the government to divest itself of ownership and convert it to a genuinely private business.

Critics of Mr Feinberg’s pay reduction policy have said that it will drive the most talented people out of the firms who will seek more lucrative jobs elsewhere. Then the firms, without the best and brightest executives, will have a more difficult time getting back on their feet and “repaying the taxpayers.”

Here are two comments on this point. First, if government-owned institutions are doomed to fail, it is better for them to conk out sooner rather than later. The general public should witness exactly what the consequences are of the state infusing money into a company that should go through Chapter 11 bankruptcy.

Second, if the best executives can get an attractive deal at a private firm that is a good sign. It means they are not trapped and can obtain gainful employment at a legitimate business. Of course, any executives who were involved in asking for a government bail out should remain at the private-public partnership, have their salaries severely trimmed, and be subjected to the whims of their federal masters. The perpetrators and collaborators in the statist scheme should lie in the bed they helped to make.

Mr Feinberg’s interventions and their effects will be watched by many. To the extent that federal meddling is uncomfortable to those connected to the bailed out firms there is a lesson to be learned – begging the government to rescue your company is a poor choice that you should not consider. Always look for private solutions to your business problems. Of course, some people will refuse to pay attention and will persist in viewing a government “partnership” as an attractive proposition. But for those who are open to the facts and are able to interpret, the consequences of selling your soul to the state should be obvious.

Why did the Federal Reserve announce its new policies the same week that Mr Feinberg acted on the bailed out companies? It is clear that the statist strategy is to argue that all firms are essentially the same, and all should be under the federal thumb. If it is appropriate to dictate pay at rescued companies – the meddler says – it is acceptable to do the same at normally functioning firms. That is why it is important to communicate that the bailed out firms have forfeited their private status and are not in the same category as private companies.

Normally you do not need the government’s permission to decide how much you will be paid, but if you seek a government bail out you should not complain about the blowback.

*** See other entries at in “Monthly Columns.” ***

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