Executive Compensation Limits: He Who Pays the Piper Calls the Tune

Thu, 05 Feb 2009 23:46:02 +0000

If the government is going to put taxpayer money into distressed firms, then it has the obligation to regulate every way that money leaves the firms before the taxpayer money is repaid. That includes dividends, large purchases, executive compensation -- everything. The government may decide that it is not feasible or constructive to micromanage the firms, but that is a decision it should make deliberately.

For me, the key word is "if." I think that the appropriate policy response is bankruptcy, not bailout in lieu of bankruptcy. In bankruptcy or liquidation, the question of whether the executives are being paid too much is moot. In bankruptcy, equity holders are wiped out and management goes with them unless the new owners -- the former creditors -- specifically wish to retain them. If they make that choice, then they should be able to pay the executives whatever they deem appropriate. Likewise if they hire new managers.

So this question only arises when we make the wrong policy choice of bailout in lieu of bankruptcy. What's the least worst way to do the wrong thing? As a taxpayer, I want competent people running the organizations that I expect to repay the funds. Almost by definition, we can assert that those running these organizations are not competent. The big problem is that they have not been fired. The small problem is that we may be overpaying them.