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The Hammer Comes Down: White House to Cut Executive Pay

Anthony Randazzo
October 21, 2009, 5:56pm

We've talked about it. There has been fear of it. Now we get the first real taste: Treasury plans to reach into the private sector and cut executive pay. The policy is being developed by the White House "Pay Czar" Ken Feinberg. There have been bills in Congress that have wanted to take this kind of action, and the stimulus did restricted retirement packages. But this is the biggest step yet from the government that has been actively trying to increase its influence in the private sector.

HOWEVER... this is move is a very nuanced decision. As terrible as the idea of the White House setting pay restrictions for executives is, this move is not as bad as it looks in practice. First, what we know so far:

...the Obama administration will order the companies that received the most aid to deeply slash the compensation to their highest paid executives, an official involved in the decision said on Wednesday.

Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the annual salaries of their 25 best-paid executives by an average of about 90 percent from last year. Their total compensation — including bonuses and retirement contributions — will drop, on average, by about 50 percent. [...]

And at all of the companies, any executive seeking more than $25,000 in special perks — such as country club memberships, private planes, limousines or company issued cars — will have to apply to the government for permission.

Alright, that all sounds crazy. Why does the administration have the right to set pay levels? Why do they get to arbitarily cut pay 90 percent? Why not 75 percent or 15 percent or 99 percent? The government just can't know what is best here.

But, this rule does not apply to the whole private sector. It is just for the seven most aided companies. And those are: Citigroup, Bank of America, AIG, General Motors, Chrysler, GMAC, & Chrysler Financial.

And what is the common theme amongst all those companies? They are all basically owned by the government right now. So, in a sense, the White House isn't reaching into the private sector as much as it is restricting the pay of the firms it operates. The problem for the White House is that they claim no nationalization has taken place. The president has said he's not running GM or Citigroup. But if they are making unilateral decisions like this, then I think that statement is proven bogus.

What strikes me as odd is how a 50 percent to 90 percent cut in pay is the answer to making a finance firm (GMAC), an automaker (Chrysler), and an insurance company (AIG) better organizations? Aren't they different? Shouldn't they be dealt with by people who have an incentive to see the companies succeed, as opposed to having an incentive to win votes? Public "pressure" is setting the pay at firms that should be private. Instead of actual cost/benefit analysis with knowledge of the industry. How ridiculous is that?

I do worry what this means for actual private firms. Will this policy get extended later? For now, I get it in terms of the government cutting pay at its companies (even though they shouldn't be), but where will this lead?


Anthony Randazzo is Director of Economic Research


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