Last week, the President announced that executive pay would be capped at $500,000 for banks that took TARP money. The argument was that federal taxpayers shouldn't be paying ridiculous money for failing institutions. Recruiters roundly condemned the idea, and pointed out that failing institutions weren't going to get better if top talent couldn't be recruited. Supporters said if you take federal money, you have to take federal rules.
It turns out that in the eyes of some legislators, everyone takes some federal money, so everyone is subject to CEO pay caps.
"Congress will consider legislation to extend some of the curbs on executive pay that now apply only to those banks receiving federal assistance, House Financial Services Committee Chairman Barney Frank said.
“There’s deeply rooted anger on the part of the average American,” the Massachusetts Democrat said at a Washington news conference today.
He said the compensation restrictions would apply to all financial institutions and might be extended to include all U.S. companies
The TARP argument had some merit, though it shows a fundamental understanding of the link between pay as an incentive and pay as a reward. Packages for compensation are bait for top performers to take on thankless jobs. Part of that compensation is rewarding even those who fail. Some may not like it, but less people were complaining when their paychecks and 401K's were increasing 10% a year.
Now that we're all down, the urge to "do something" is a dangerous one. Barney Frank is proposing fundamentally altering the economy by limiting CEO pay. This is part of a broader societal trend of demonizing business owners as greedy and workers are noble. So how are business owners responding?
They're selling their companies and sitting on the sidelines. They're laying off workers and cutting back on investment, secure in their cash flow and doing part-time consulting to supplement their income. Our best producers recognize that the risk of starting and growing a company isn't worth it when the government and your workers despise you.
It's hard running a business. There is pride in employing people and helping your community. It's a powerful motivator. When we allow demagogues to turn working families against business owners and CEO's, we set the stage for failure. This doesn't mean that we don't prosecute criminals or punish those who betray the trust of their employees. It does mean that when we start from the principal that everyone in executive management is a crook, we shouldn't be surprised when those with the ability to lead choose not to.
