Executive Compensation

There is a lot of financial turbulence in the United States right now. Many companies are turning to the government for bailouts. This started with the government sponsored enterprises (Fannie Mae and Freddie Mac). It then spread to the banks. It quickly started with insurance companies. Now it seems the automotive industry is trying to get on board. Most of the time, this bailout money comes with some strings attached. One such stipulation is that there is a cap on executive compensation.

I do agree that if a company is about to go bust, and they want the government to save them by providing taxpayer money, then the company needs to keep its CEO pay in check. You don’t get a bailout, then turn around and hand out a huge CEO bonus. The CEO or other officers should only profit if they run the company in such a way that it creates a huge windfall, not a need for a bailout.

Here is where it gets interesting. Suppose a company did not ask for a bailout? This is the case with some of the banks that the government decided to include in its plans. Essentially they were forced to agree to help from the government. They were made to agree. This might turn out to be the best for everybody. But do those companies then need to submit to rules on executive compensation?

What this boils down to is a fundamental question. Should a CEO be able to make unlimited profit from working at a company? Suppose you are the founder. Does that not entitle you to most of the profits? Looking at this another way, should you be able to negotiate whatever compensation the market will bear if you are the CEO? I am sure it is hard to attract top talent to banks these days. A company may need to really pay out to get the best. In theory this should work out, as the best CEO would be able to run the company in such a way that it is ultra profitable.

This post raises more questions than it answers. At heart I think I am a believer in the free market. The government should not normally step in and mess with business. If a company makes good profits, the government should not interfere. And if a company does not, the government should let the company fail. This is the law of the free markets. The market itself should decide which companies stick around, and which ones are profitable. CEO compensation should be determined in the same way. Whatever the market decides, let that be the pay for the CEO.