CNBC reported on Obama’s Pay Czar earlier this week:
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.
As the Heritage Foundation has explained before, wage controls don’t work . Policy based on envy and disdain rather than sound economics will do nothing to aid a recovery.
How does one incentivize a recovery from the most capable executives of these industries by slashing their compensation by 90 percent? What’s to stop those best capable of running these corporations from leaving and working for a company where there is no government limit on the compensation they can earn?
But even more importantly, with all the shouting and pointing at these top executives, people have forgotten about the simple fact that these payout severance packages, aka “golden parachutes,” are a beneficial function of the market.
As we’ve argued before, economists have identified multiple reasons that golden parachutes are beneficial. Most importantly, they incentivize the executive to make the best decision for shareholders:
First and probably most important, they reduce executives’ natural resistance to takeovers. A top executive is a leader, and typically leaders don’t like to give up their position at the top of the pecking order, especially when that position comes with prestige and perks. But sometimes a change in leadership, such as through a takeover, leaves a corporation and its shareholders better off. When a takeover is in the cards, shareholder and executive interests diverge: shareholders may stand to benefit but the executive may stand to lose his job and prestige. In this kind of situation, golden parachutes help to align the interests of executives with those of other corporate stakeholders, like shareholders and employees, by encouraging executives to make a deal, rather than doing everything possible to stay put, to the detriment of everyone else.
Second, golden parachutes encourage executives to put their talent on the market and invest in firm-specific human capital, especially in corporations and industries where changes in management are routine. A good manager can add a lot to a corporation’s bottom line, but the most skilled managers are understandably wary of giving up their current positions or industries for new ones, where things may not work out for them. In this case, golden parachutes are a sort of insurance policy against both the risk that taking a new job may work out worse than other options at their disposal and the risk that focusing on company-specific matters won’t translate into better career opportunities down the line. As a result, the market for executive talent is stronger, and executives are willing to delve more into the businesses that they run.
Executive compensation is a business matter that must be left up to the shareholders of a corporation. Wage controls from arbitrarily selected bureaucrats will not work in bringing about a recovery, or fixing the system.
David Weinberger currently is a member of the Young Leaders Program at the Heritage Foundation. His views do not necessarily reflect the views of the Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm
The era of engaging the world’s worst actors continues apace with the recent announcement that the United Nations Development Program has formally returned to North Korea and restarted its program there on Wednesday September 30, 2009. For those who don’t know the history, information provided by whistleblowers to the U.S. Mission to the United Nations led the U.S. to question UNDP about its practices and activities in North Korea. Based on the information it received, the U.S. initiated an investigation that revealed numerous UNDP violations of U.N. rules and regulations and led the UNDP executive board to suspend its activities in North Korea in March 2007. According to a FoxNews summary of an independent audit commissioned by UNDP and released in May 2008, UNDP “routinely, and systematically… disregarded U.N. regulations on how it conducted itself in Kim Jong-Il’s brutal dictatorship, passing on millions of dollars to the regime in the process.”
In light of North Korea’s actions over the past year and its disdain for the U.N. Security Council’s resolutions regarding its nuclear-weapons and ballistic-missiles programs, the decision to return is baffling. The barbaric indifference of the North Korean government to the suffering of its own people should lead the U.N. to pull out of North Korea all together. In other repressive regimes, the U.N. and NGOs can sometimes work around the government to help the people directly. In these cases, there is some justification for continuing U.N. humanitarian activities. There is little basis for this approach in North Korea. The regime controls virtually all international humanitarian activities. Despite the best efforts of the U.N. and other providers of humanitarian assistance, aid to North Korea is only permitted if it benefits the regime. UNDP’s return to North Korea — and the continued present of other U.N. agencies like WFP and UNICEF — rewards the reprehensible government of Kim Jong-Il.