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February 06, 2009

Pay Caps are Overdue

A free market demands pay caps for those who have been insulated from failure. Should've been in the bank bailout bill from the beginning (although there shouldn't have been a bank bailout bill at all).

The counter-argument that talent will leave the bailed-out institutions is nonsense.

First, why would we assume that the people who head these institutions are talented at anything beyond maximizing executive pay?

Second, where is all this formerly expensive talent going to go? Even if they hired Arthur Andersen to help them "be a Tiger", they don't play golf well-enough to make the pro circuit. Their rapidly shrinking (but non-subsidized) competitors aren't going to hire the losers while they're letting their own people go. We don't want them in startupville and we don't do high salaries or high perks here; even our option plans are changing to restricted stock now. The market for over-paid executives is probably worse than the market for MacMansions.

Third, they are in effect government employees paid with public money. $500k is extremely generous for a government job.

Fourth and most important, the prospect of a future payoff in restricted stock isn't bad at all – unless you don't believe that the company you are leading has a chance of success – in which case said company ought to be folded without paying you another dime. If I weren't retired, I'd run any company I believed in for $1/year if the restricted stock deal were right – and I wouldn't lead a company I didn't believe in for any salary. Maybe I'm just jealous because I never had a seven figure salary as a CEO or in any other position although I did make money from options (Microsoft) and selling founder's stock (ITXC for which we provided the seed capital).

Then there's the argument that companies won't take a bailout if it limits executive salaries. If they don't need a bailout, that's fine, of course, and a good thing they don't take one. If they do need a bailout and executives block it, the board should fire those executives. If the board doesn't do that, then stockholders should fire and/or sue the board. There is such a thing as fiduciary duty. Besides, who is going to pay the executive salaries if a company which needs bailing out doesn't get so bailed?

Pay caps for bailouts won't ruin the free market; they protect it. It would be a good thing if some "low paid" executives demonstrated some success. The spillover might be more backbone from pension funds and other big holders of stock and downward pressure on executive salaries across the board. This is the time to wring out excesses of all kinds.

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