President Obama announced that he wants to impose compensation limits on executives that receive government financial rescue funds. These proposals are said to include the following provisions:
- A $500,000 cash cap on annual compensation for senior executives
- Requiring top executives at financial institutions to hold stock for several years before they cash out
- Requiring nonbinding "say on pay" resolutions giving shareholders more say on compensation
These provisions would only apply to firms receiving government funds and would be applicable until they are repaid to the government.
This is a dramatic intervention into corporate governance, but then again the government bailouts are also unprecedented as well. Several are claiming that this is another step into more socialist America.
I disagree. These regulations would only be applicable to firms receiving government funds. If a private entity was providing similar financial support to a financially troubled firm, it would be expected to impose similar restrictions; this would merely be fulfilling its fiduciary duty to its shareholders and exercising fiscal prudence. Why should the government be any different? The government also has a fiduciary responsibility to the taxpayer to ensure that its funds are being used properly.
These regulations also directly address the FreePasser™ issue that I mentioned earlier. A FreePasser™ is a person or entity that makes decisions but bears none or very little of any negative consequences associated with the outcome. In many cases they garnish the rewards associated with a positive outcome. This is a dysfunctional and destructive problem -- most of the benefits with few of the risks.
I believe that addressing the FreePasser™ issue with compensation limits will not hurt the equity markets. On the contrary, it will address a key concern about the government bailouts. Many believe that the money will be wasted with few benefits for the economy. This gives some confidence that the government is exercising similar fiscal prudence that a private organization would be required to do.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He is the author of Follow the Fed® to Investment Success and an expert on FreePassers™. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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Reader Comments (Page 1 of 1)
2-04-2009 @ 1:44PM
BHarrison said...
I may have voted for McCain; and been a Republican for over 38 years; BUT I whleheartedly applaud Obama's proposals. The only way to get the exorbitant CEO and uppermanagment compensations adjsuted is by exactly what Obama is proposing. If you limit the CEOs compensations, the tricle down adjustments to the board of Directors, and upper management should follow. It has become all too obvious that CEOs and managment are not going to adjust their compensation plays (self regulation doesn't work); and government intervention is the only way to get these necessary changes implemented.
2-04-2009 @ 3:07PM
thedude said...
Top Tier execeutive pay has always baffled me.
Executive salaries should be limited to a % of the net profits a company earns. Not stock valuations or some arbitrary assesment of said executives egotistically inflated self worth. There are far too many accounting games execs can play to manipulate stock shares and use them to illegally influnece their pay packages stock options.
Give them $1000/ week and then a % of net profits calculated after taxes on earnings have been paid and dividends paid to shareholders. If the company is playing financial games to claim losses and avoid income taxes then I guess those execs don't get paid.
Even better only pay them a % of the taxes paid on the companies net income and stop giving them insane perks (ala Corporate Jets and vacation business "retreats")
You may say that limiting top tier exec pay will drive some of the best executives out and I say that is a good thing as these are the execs who drove the economy into the hole that it is in now.
Obama should institute a policy that legally alows "average joes" to beat up Harvard Grads - oh wait that's right Obama went to Harvard too.
2-04-2009 @ 5:09PM
rojoreno said...
I know very little about the finance biz--but i bet i could have done better than these thieving CEOs--i bet i could have driven these institutions into the ground in half the time it took these bozos and i would have done it for a modest salary.