Pay czar Feinberg pressed to ease AIG pay restrictions


While Timothy Geithner gets deservedly raked over the coals for handling the America International Group (AIG) "negotiations" with kid gloves, federal officials are pressuring executive pay czar Kenneth Feinberg to ease pay restrictions on the company for the year 2010.

The concern is that tight pay restrictions, while politically popular, might hurt AIG's ability to attract and retain competent people -- thereby putting the taxpayers' long-term investment in the company at even greater risk.

This is a great example of how dangerous the pay czar is: compensation should be set based on what policies will produce the greatest returns for investors (bondholders and stockholders), not based on a desire to appease the peasants-with-pitchforks crowd of righteously indignant voters.

"AIG is the best example of why the government should never get itself in the position of even having to make these tradeoffs," Anil Kashyap, an economics professor at the University of Chicago Booth School of Business, told the Wall Street Journal (subscription required). "It's why you don't want the government involved in the private sector in the first place."

What's the solution? The solution is to install an independent and competent board of directors at AIG with an independent and competent compensation committee that can make executive pay decisions based on economic factors -- not based on political factors or inappropriately chummy relationships with senior management.

It should be possible to separate the politics of our involvement with AIG from our desire to generate the most value for our stake in the company. But it's unlikely that that will happen.

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