Populist appeasement is a powerful tool – politicians regularly capitalize on misdirected and uninformed public anger with visible, but realistically ineffective or counterproductive, legislation or executive action.
The most glaring recent example is the regulation of compensation at companies receiving major aid from the Troubled Asset Relief Program (TARP). The ambitions of Pay Czar Kenneth Feinberg and demands from legislators have deviated from the real objective: restructuring the compensation system for banks so risky behavior is discouraged and long-term health of each company is rewarded.
Although theoretically any government interference in private business is unwelcome, we have clearly seen that targeted government regulation and support can be a powerful and necessary tool for maintaining stability in the economy. Unfortunately, the current push to tie pay to performance has given way to meaningless reductions in salary and compensation for some high-level executives.
Even Feinberg seemed to concede that compensation decisions are better left to shareholders and boards of directors when he said, “I wouldn’t begin to say how much money you should make on Wall Street.” If so, why has he proposed reducing the cash salaries of the executives under his scrutiny by 90 percent, and the total compensation, including bonuses and stock options, by 50 percent? Ironically, these suggestions from Feinberg would only apply until the end of the year – two months.
Aside from the short lifespan of the pay czar’s decision, there are other idiosyncrasies with the proposed compensation cuts. First, the justification for any government regulation of these companies is that the government has a stake in their success; that is, we, the taxpayers, have essentially loaned these firms money and want to make sure they are profitable enough to pay us back. The reductions in executive compensation, however, may lead companies such as Goldman Sachs, J.P. Morgan and Morgan Stanley (all of which have repaid their TARP loans) to snatch up the talent from the current TARP recipients. Feinberg argues the overall compensation for these top executives will remain high enough to dissuade them from defecting to other companies. However, the market has priced their education and abilities far above his proposed value – meaning unregulated firms will have no qualms about offering larger salary and benefit packages to steal the most capable employees from the TARP recipients.
Second, the government has only given itself the power to regulate seven of the largest companies in the TARP program. Companies that have repaid the loans but benefited greatly from the large government injections of capital earlier this year remain unrestricted. Once again, by singling out the companies in which we have a vested interest, the government is hampering our ability to recoup the public’s investment.
I am not advocating a massive free-for-all. However, political representatives need to stop fueling public outrage over the compensation of Wall Street executives. The magnitude of their pay is not the issue – the market sets those rates. Instead, our representatives need to focus on the actual goal: protecting taxpayers from public exposure to risk for private benefit by promoting compensation structures that reward responsible investment strategies. Feinberg and the rest of our politicians should not seek to cut off the heads of the companies just because it pays dividends to them in political capital; instead, they need to enact reforms that encourage successful business, while maintaining the economic stability of our country.
Weinberg sophomore Nate Nicholas can be reached at [email protected].
