Thursday, February 05, 2009

Salary caps could be extended

Yesterday Terrence Watson posted on Obama's announcement that he would cap salaries of executives at companies receiving taxpayer support at $500,000.

Some say that very high salaries don't necessary guarantee the best executives and that these companies had it coming if they had decided to ask for government aid. These arguments are seductive, but flawed.

It's true that having high salaries doesn't guarantee the best executives, but it's also true that having access to medical care doesn't guarantee good health. Taking away the ability of companies in trouble to attract those likely to have the talent to get them out of the mess they're in will lead to little other than dependence on tax dollars becoming endemic to that company.

In the US, companies in trouble would be stupid, at this point, to not go after a bailout as an alternative to overhauling their organizations or declaring bankruptcy. There's money being thrown all over the place and only the completely naive should be surprised at the enthusiasm with which businesses are taking up the government on its offer of handouts. It's completely believable, then, that the government should want to do something about all the money being thrown around.

But if the purpose of the salary cap is to discourage companies from taking advantage of the bailouts, then why have them at all?

To shed some light on this perplexing question, Barney Frank, House Financial Services Committee Chairman, said today that Congress will consider extending the $500,000 salary cap to executives of all financial institutions and perhaps to all U.S. companies.

“There’s deeply rooted anger on the part of the average American,” the Massachusetts Democrat said at a Washington news conference today.

He said the compensation restrictions would apply to all financial institutions and might be extended to include all U.S. companies.

The provision will be part of a broader package that would likely give the Federal Reserve the authority to monitor systemic risk in the economy and to shut down financial institutions that face too much exposure, Mr. Frank said.

Get ready to watch investments run as fast and far from the country as they can if this is the kind of legislation that's going to pass in the United States. I have a hard time believing anyone is actually stupid enough to not see what would happen under this type of proposal, but I never count out the possibility that politicians will find a way to lower the bar.

cross-posted to the Shotgun blog

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