Why the Obama Salary Cap Is Lame

Those ever-so-popular executive compensation packages have been in the news quite a bit lately thanks to President Obama's decision to force companies to limit the amount of money they give to bank executives if that bank gets a bailout check. I think it's a bad idea for companies or the government to limit executive pay (although I may be the only one), and here's why.

So Long, Suckers

Think about this. Imagine that you are one of those highly-paid executives, and your company suddenly adopts a plan that will limit your pay. Now you have a choice. You can either stay at your current job and get less pay, or you can move to a company down the road that would love to get your skills working for them (and they will be paying a premium for your services). What are you going to do? We both know that you're going to move to the new company for more pay. Why would you expect an executive to do anything different?

You Get What You Pay For

If you want a good, top-shelf executive to run your company, you are going to have to pay for one. Consider this example: when Ben and Jerry's were looking for a new CEO back in the 90s, there was a salary cap imposed on the current executive's pay. After a widely publicized "open to the public" search for a new CEO, the company ended up using an executive search firm to find a new manager. And guess what? No salary cap was forced on the new CEO, because the company knew they wouldn't find a qualified individual that was willing to work for so little.

Not Too Shabby

At one time, I was very angry when I heard about a CEO making a $5 million bonus if the company lost $10 million for the year. I wondered at the audacity of those executives to gladly take a fat check when the company ended up in worse shape than when the year began. Then I figured something out about how those bonuses work. For instance, what if the company would have lost $20 million without the guidance and leadership of the CEO? In this scenario, the CEO saved the company $10 million. A $5 million bonus for saving the company twice as much money is a great deal for both the company and the CEO.

If, after reading these points, you are still unconvinced, then please us know why in the comments. Remember that professional athletes and movie stars make quite a bit more than most business executives, but there is no outcry about that. If you have a well-reasoned argument, we'd love to hear it!

This is a guest post by Ben Eubanks.

Comments

[Edgar]

I agree on your point about not placing a cap on executive salary. However, I think an executive should be held accountable when his/her company under-performs for consecutive quarters. Most of these execs have stipulations in their contracts stating that they CANNOT be fired for the same reason a worker bee can like not performing well. They can only be fired if they misrepresent the company or behave in an embarrassing manner which can damage the company's reputation. That is where this problem lies, and no one is addressing it.

[Kevin]

according to the first google result for executive pay, http://www.latimes.com/business/la-fi-endrun-execpay5-2009feb05,0,2040936.story
1)The top 500 CEOs made around 10.5-11.8 million per year, all told.
2)All told, the average NBA salary was roughly 5.5 million. Less than 50 players made more than 10 million per year. And the NBA is the best paying professional sport.
3) Every professional sport has a salary cap. Regardless of the income of the team or caliber of players. This rule is to enforce fair competition between the teams for superstars.
4) I don't like the comparison between sports and CEOs, mostly because sports are already governed by interstate commerce rules. Congress can call players, coaches, and owners to answer for perceived faults and violations, like the steroids scandal.
5)If your company was in a position to lose 20 million, liquidate it. How did you get there in the first place?
6)If the executives so heavily influence company income, which seems reasonable, why would you pay the ones that put you in a 20 million dollar hole? I can see paying someone a ton to save you from that situation, but executives got you there in the first place.
7)Final thought, if you want to compare it to sports, then it should be government regulated. If you want to compare to movies, then you pay them a small amount up front, and they get paid royalties based on the movie's performance. The same situations just don't exist in these three realms.

That about does it for me for now.

[Andrew G. Rosen]

The view from my cubicle tells me that most CEOs, most athletes, and most movie stars are overpaid...

[Ben]

@Kevin

1) Then I really, really hope that I'm a CEO one day. Don't try to discourage me with a salary cap. And what were the revenues of these companies where the CEOs were making ~$11M? Probably pretty good.
2) And that's for guys that have no use for education and little responsibility for others. Whereas a CEO is held accountable for what happens to his/her employees and makes use of an education daily (whether that education is formal or informal).
3) And yet some teams with low salary budgets can field some amazing athletes. I read a great study on this back in college, but I have no idea where it came from. Darn.
4) I fail to see the relevance of this point.
5) Ask Lehman Bros and the other companies that dropped like flies last fall. It happens.
6) And those execs that stunk wouldn't get the performance bonuses. They would get paid their base salary and other perks, but they wouldn't get the bonuses tied to performance. Who knows, maybe it was a bad economy that put them in that situation in the first place, and the former CEO did his/her best to hold it to "only" $20M?
7) Those comparisons were based on income alone. Like I said, the performance bonuses can be compared to the movie star's royalties.

BTW, an athlete's salary doesn't include the product promotions and other things like that, right? I'm not exactly up on my athletic pay standards. :-)

[Candice]

I'm with President Obama, why should we reward failure?

[Yo Spiff]

My only objection to the huge bonuses for execs is that the guy at the top should be setting the positive example for the employees below him. Joe average will be more accepting of his minimal or nonexistent raise if he knows the CEO is not getting a huge bonus. And really, don't the big guys earn enough that they can afford to set such an example?

The exec may truly deserve it for saving the company's bacon, but I am a big believer in example setting. Save it for when the economy is going well and the company is making good money.

[Wild Bill]

The key here is the "bailout money" these companies are accepting tax payer money in return for retaining and creating employment and keeping their respective companies viable and operational...not for rewarding any losses at all! In my humble opinion no human, super genious or otherwise, is worth more than a million bucks a year in salary...tie any bonus to a companies growth and penalize future salary to loss...it's ludicrous to do it any other way and if the companies that are looking for bailout money can't live by this simple covenent they should be denied the money and allowed to fail.

[Derek]

While I see where the anger can stem from regarding CEO pay, the fact of the matter is these CEOs make 10million now, period. If the company starts to fail, and you put a cap on their salary, what motivation do they have to wake up every morning and work for 5% of what they were getting before. They would get up and leave and leave the company in even further turmoil.

[Olgamoskvina]

�� �� ��� �� ������� ��� !!))))