President Bill Clinton first capped executive salaries at $1 million a year in 1993. The limit didn’t change much in terms of executive compensation. Instead, companies offered more benefits, including stock options and cash bonuses, in an attempt to lure high-performing business people.
Taking Clinton’s initiative a step further, President Barack Obama has lowered the salary cap to $500,000 for companies receiving bailout money. Regardless of whether this is an attempt to gain favor with a public that has been largely unsupportive of the stimulus package, the move may not have any real impact on the corporate world.
Sure, it may cause some shuffling and rewriting of benefits packages to offset the new changes — as the Clinton cap did — but it may not produce the limits Obama intends.
In fact, it may just make things worse.
Even if limiting executive salaries doesn’t affect incentives, it may result in lower-quality employees. An ailing company seeking to hire a new executive to steer it from its financial morass may have a difficult time attracting top-of-the-line candidates if it cannot offer competitive pay.
Under-qualified executives are cheaper, but have less experience and may end up being a detriment to companies. Executives who haven’t proved themselves risk a company’s stability.
In a letter to the New York Times, Reed Hastings, chief executive for Netflix, suggested a “tax, not shame” policy. He explained that company boards do not enjoy over-paying any of their employees and that it is their job to abstain from wasteful spending. Hiring the wrong executive, he said, could be an “enormous disaster” and result in a larger deficit than the $500,000 difference in pay would incur.
Taxing executive bonuses seems to be a more reasonable effort at curtailing “golden parachutes.” Putting a 50 percent levy on executive bonuses, as Hastings suggests, would generate substantial monies for the government, rather than simply reducing the payroll costs of the bailed-out institutions.
The need for more oversight of government-sponsored enterprise must not go unnoticed. Though the salary cap appears to derive from good intentions, it has historically failed in practice.
Also, don’t forget that company officials are still people. Their lives may be a little more extravagant than the lives of average middle-class citizens, but it doesn’t matter who you are — a 50 percent pay cut is extreme.
Yes, these executives are supposed to lead by example and live within their means, but for the government to force an individual to change those means entirely is simply inconsistent with the principles of private enterprise.