Out of Control Policy Blog

Congress Wants to Regulate All Pay

Yesterday, the House began debate on the little discussed "Pay for Performance Act of 2009," a shocking bill that would give the Treasury Department power to control salaries for every employee at bailed out firms. Yes, not just the vilified executives, all employees.

This bill comes in the wake of the 90 percent tax on executive pay passed by the House two weeks ago. That legislation only targeted bonuses that pushed household income over $250,000. This Pay for Performance Act (PPA) would replace that bill, which has yet to be taken up by the Senate, though would be similar to the punitive tax in that it would be retroactive. This bill would not only change the compensation agreements for employees throughout the firm, but would grant Treasury authority to go back and adjust already finalized contracts. (I've discussed before the problems of devaluing contracts through this kind of implicit ex post facto behavior.) 

The Washington Examiner breaks down other parts of the bill:

"The measure is not limited just to those firms that received the largest sums of money, or just to the top 25 or 50 executives of those companies. It applies to all employees of all companies involved, for as long as the government is invested. And it would not only apply going forward, but also retroactively to existing contracts and pay arrangements of institutions that have already received funds.

In addition, the bill gives Geithner the authority to decide what pay is 'unreasonable' or 'excessive.' And it directs the Treasury Department to come up with a method to evaluate 'the performance of the individual executive or employee to whom the payment relates.'"

President Obama has already fired a car company executive (and won't rule out firing others) and the White House is deeply involved with selecting new board members for GM. And now they want to figure out what equitable pay is too?

Beyond the fact that there is only so much the government can do and won't do this part well, consider the problems with politicizing this process. What if Treasury sets wages too low causing constituents to get on the phone to their congressman who in turn pressures Treasury to raise wages. All of a sudden the political game supersedes what's best for running a business. What if bonuses are the best way to pay people or retain their services? That would face a huge public uproar. And companies can not be run by public consent.

Ironically, the PPA author claims that those who vote against the wage controls are being paid off by big companies:

"This bill will show which Republicans are so much on the take from the financial services industry that they're willing to actually bless compensation that has no bearing on performance and is excessive and unreasonable," Rep. Alan Grayson (D-Fl) said. "We'll find out who are the people who understand that the public's money needs to be protected, and who are the people who simply want to suck up to their patrons on Wall Street."

Well I don't earn a dime from Wall Street. I'm not beholden to anyone there, and I think that these kind if pay limitations are extremely damaging to business development. Treasury can not set the wages for tens of thousands of Americans at every firm that has received bailout money. It neither has the capacity or the local knowledge to make those decisions.

Anthony Randazzo is Director of Economic Research


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