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Posted by on Feb 6, 2009 in At TMV, Politics | 2 comments

Some More Thoughts On Executive Compensation And The Obama Non Plan

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In an earlier post I discussed that while I favored the Obama plan to limit compensation of executives at firms receiving money from the bailout I thought it might be neccessary to adjust the limits somewhat. The reactions I got seemed to focus entirely on this segment of the posting without commenting on any of the others, so I thought I’d expand on the subject.

To make it clear I am not suggesting that we pay crooked corporate executives one penny, let alone $ 500k or beyond. It never entered my mind that the same idiots who screwed the companies up in the first place would be the ones to continue operating the till.

In addition, my objections were more based in pragmatism than ideology, the feeling that I don’t care how the problems in the companies are solved, just that they are solved. To stand on a principle and allow these companies to sink further into failure may make you feel good but it will make the economy worse.

But I have no problem with the $ 500k amount and if it is sufficient to allow for the companies to hire good talent, then by all means go with it, or indeed lower it (the President can get by on $ 400,000 so perhaps these guys can too).

Indeed as I have reviewed more details of the plan my problems with the current proposal go well beyond these issues as it now appears that the amount is not relevant since the rule will not apply to ANYONE. Under the proposed rules the compensation limits would not only apply just to companies getting ‘exceptional’ help but only to those who take such help IN THE FUTURE.

In other words if you already have your cash and don’t take any more ‘exceptional’ loans then you aren’t restricted. Clearly we need to change the proposal, and in my view we need to do so dramatically. The first step is to apply the rule to ALL companies getting assistance from the taxpayer. I don’t care if it’s $ 1 or $ 100,000,000,000 in aid, if you want money out of my pocket, you are going to abide by the compensation limits.

The next step should be to expand beyond the troubled companies into the industry in general. Compensation packages have grown outrageously over the years and while the right would argue that ‘free markets control’ the fact is that with large corporations it is a small board of directors who run the show, average stockholders have no real power.

One of the reasons that these packages are so popular is that they are deductible and thus provide the corporation with a great way to get rid of profits, even when the packages are in future stock sales and thus not actually a drain on real assets or profits. Indeed many corporations use this dodge to get a double dip on the balance sheet. They deduct the ‘cost’ of the stock when the options are granted and then later deduct the ‘loss’ when the options are cashed in.

With the smart accounting tricks common to these companies they can end up paying their executives huge salaries and yet end up with more money after than before, thanks to the tax benefits.

Therefore I would propose that we place income limits on deductibility of compensation packages for all companies. The amount of the limit could be higher than the $ 500k rule for companies getting income from the government but would set a level above which deductions would not be allowed. Stock options would not be deductible at all (or would be seriously limited) since they are not an actual expense and direct compensation deductions would be limited to a set amount.

This would not mean that the company is not free to pay the boss what they want, but they would not be able to make a profit in the process.

Cartoon by Mike Keefe, The Denver Post

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