The populist uproar is deafening regarding the excessive salaries and bonuses on Wall Street. Over $18 billion in bonuses paid to Wall Street barons in 2008--big rewards for total and utter failure, according to most Americans. Sen. Claire McCaskill, D-Missouri, was the first politician to come out swinging, urging a pay cap of $400,000--the salary of the President (or is it?). Yesterday President Obama followed suit with executive orders, but upped the cap $100,000 to a half-mill.
The Post Partisan
As the New York Times reports:
The new rules would set a $500,000 cap on cash compensation for the most senior executives, curtail severance pay when top executives left a company, restrict cashing in on stock incentives until government assistance was repaid and prod corporate boards to closely scrutinize luxury perquisites like private jets and country club memberships.
Most commentators agree that there is plenty of room for manipulation here. Lower-level executives are not subject to the rules and so are free to command millions. As well, the rules apparently do not limit the amount of bonuses that can be awarded, other than to give shareholders an opportunity to weigh in with "non-binding" votes on proposed compensation strategies. Finally, the rules do not apply to any of the billions that have already been paid out to the execs for 2008:
[The rules] do not apply to the more than 350 institutions that have already received bailout funds, only to those that seek aid under the next phase of the bailout program. And companies that seek aid but do not need exceptional government assistance can waive the $500,000 pay cap, as long as they submit their executive pay policies to a nonbinding shareholder vote.
Nevertheless, the Administration's guidelines could pack a serious punch for many of the big wigs. Like, for example, Rick Wagoner, the CEO of General Motors, who pocketed $11.7 million in 2007. (Where was the UAW?) Or BofA CEO Kenneth Lewis who raked in $14.4 million.
The rules shouldn't be controversial. If you come crawling to Washington seeking taxpayer money to keep your private enterprises afloat, then the taxpayers should have a say in how you use that money. It's common sense.
But common sense is a rarity in some circles. Fired HP chief, Carly Fiorina, wrote an opinion piece today complaining that government should not have any hand in private compensation decisions. Fiorina would rather have dispersed, unorganized shareholders deal with the problem. Writes Fiorina:
[I]t doesn't strengthen our economy when government decides how much each job is worth. In America we leave that job to markets.
So what's the answer? To strengthen transparency, all aspects of CEO pay and perks should be fully disclosed on a regular basis. This should include airplanes, cars, golf-club memberships, bonuses, stock options, retirement plans and salaries -- in short everything that a common-sense person would consider part of a CEO reward package.
To strengthen accountability, all aspects of CEO compensation should be voted on by shareholders on an annual basis.
The problem is that this is not, strictly speaking, an "idea." It's the status quo. Shareholders have always had the ability to check management's compensation abuses. But, historically, they haven't. Self-regulation, which is essentially all that Fiorina is suggesting, has not worked.
I imagine Stephen Moore, whose recent opinion piece in the Wall Street Journal is attracting some attention from free-market ideologues, is not too happy either. He's going out on a book tour to rile up the libertarians and bash President Obama. Moore's WSJ piece holds up the late Ayn Rand's Atlas Shrugged as a model:
Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.
Originally titled "The Strike," Rand's novel asks, What would happen to society if all the CEOs and other "men of the mind" (i.e., wealthy industrialists) who according to Rand are the true visionaries and "motors" of our culture, went on strike? Her answer is that progress and civilization as we know it would abruptly come to a halt. (That is, the same thing that would happen if the rest of us wet on strike.) Rand uses this thought experiment to argue that we must not interfere with business leaders; they must be allowed to roam free so that they can bring to fruition their brilliant ideas without hindrance from government or anyone else. According to Rand, in order for civilization to grow and prosper, business leaders must not be made to consider anyone's interests other than their own. Any time spent helping fellow citizens or society as a whole, is not only a waste of time for Rand; it's destructive and thus "evil." Atlas Shrugged is, in essence, The Wealth of Nations on steroids. Not surprisingly, Ronald Reagan was an admirer of Rand's, as was Alan Greenspan.
The rejoinder can be reduced to one word: experience. Theories are only as good as the facts, if any, that support them. We tried Rand's laissez-faire approach for the better of 30 years. It failed. We gave the "cultivators of wealth" the reins, and they steered us into the rocks, but not before cultivating heaps of wealth for themselves, and only themselves.
But don't take it from me. Take it from Alan Greenspan, once the high priest of Rand's extremist free market ideology. While testifying before Congress in October Greenspan confessed, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."
So marks the end of the tyranny of self-interest or, as many euphemistically call it, the "Reagan Revolution." At least for now.
The Post Partisan