CEO pay restrictions don’t help bailout

President Barack Obama and his pay czar, Kenneth Feinberg, have officially responded to discontent over the bailouts. Feinberg has set regulations limiting the salary of top executives in bailed-out firms, perhaps in an attempt to assuage the anger of Americans.

While the sentiment toward the bailouts is not necessarily unfounded, the limits to executive compensation will likely create a worse situation for these corporations, their stockholders and the American taxpayer.

Often, we overcomplicate the motivations of companies, making them out to be enemies of the average person. Their CEOs are overpaid and workers are underpaid because of the sinister intentions of companies. However, corporations, while not necessarily altruistic, are not evil. Instead of putting a moral interpretation on executive pay, we have to look at it as an economic tool that companies use to attract top talent.

“Corporate greed,” as this concept is sometimes called, is blamed for nearly all the grievances our economy faces. And in many cases, companies try to make an easy buck and fail, exhibiting this corporate greed and causing complications within the financial world. While this should be examined and possibly regulated, high executive salaries are not part of corporate greed.

Placing much of the blame on executive pay is neither true nor constructive.

On the surface, limiting executive pay may not seem to be a problem. To understand why it is a problem, we have to look at corporations as bodies that earn money for stockholders, not abstract evil entities.

If shareholders want to be “greedy” and to make piles and piles of money, it seems counter-intuitive to say so sweepingly that corporations overpay executives. Perhaps certain executives who are incompetent are overpaid but, generally speaking, there has to be a reason why CEOs and other corporate leaders are paid so highly.

Imagine you are a “greedy” majority shareholder who owns 51 percent of a given company. You pay the CEO of the company $30 million a year as compensation and he, in turn, manages the corporation and attempts to make it as profitable as possible.

Instead of thinking of the $30 million dollars as merely company money, think of it as money that you personally paid to his salary. Unless you truly thought him to be worth $30 million, you would not be willing to part with your own money to pay his salary.

Since there are few great managers and innovators like Steve Jobs or Bill Gates, companies often have to pay high salaries to their CEOs. Like a sports team that pays its star athletes millions of dollars, a corporation must do the same. The Yankees, who have the highest payroll of all Major League Baseball teams, are among the most consistent winners in all of sports; corporations with talented leaders are similarly more consistent in their returns and successes.

By limiting bailed-out companies like American International Group Inc. in compensation, we are keeping them from getting, and retaining, the executive talent that they need in order to prosper. While our anger may lead us to want to punish those responsible for the meltdown, our wallets require that we think about the economics of the issue. A company with solid leadership will be more likely to repay its bailout money and be a part of rebuilding a sustainable and thriving economy.

Unfortunately, we have done the opposite by limiting pay. According to The New York Times, former AIG executive Maurice Greenberg is likely “luring AIG’s people.” His new company C.V. Starr may “hasten the exodus of AIG’s talent, sending more refugees into Mr. Greenberg’s arms, since C.V. Starr is free to pay whatever it wants.”

Since last year, AIG has lost more than half of its highest paid executives. If AIG is not able to keep talented people by paying what it wishes, the chances of a swifter return to profitability and repayment of bailout money become slim.

Instead of making a scapegoat out of CEO pay, we need to focus our energies on limiting or stopping practices that lead to large rewards on the backs of larger risks.

The financial and corporate world is not perfect, and people are not necessarily perfectly rational. They don’t always choose the best CEOs who will run companies with intelligent plans.

But, if we attempt to limit the pay of the executives, then we are forcing these corporations to settle for a less-than-sought-after person.

If every executive was as intelligent an investor as Warren Buffett, as skilled a speaker as Obama and as able a leader as Abraham Lincoln, then there would be no need for discrepancy between pay of corporate leaders. Unfortunately, these super-CEOs are not in unlimited supply.

In order to avoid getting leadership that will run a company into the ground, the Obama administration must remove, or at lease loosen, its limits on pay for bailed-out companies. While executives, like sports stars, sometimes do not live up to their high salary, it does not mean that a company can afford to limit their compensation.

Although the pitchforks and torches may demand current retribution for bailout woes, our future economic stability and prosperity depend on Obama setting sound economic policy and not caving in to political pressure.

E-mail Feeney at [email protected]. Send general comments to [email protected].