Salary Caps for Companies Receiving Bailouts

[Pangloss]

http://www.latimes.com/business/la-fi-pay-impact-2009feb05,0,4979583.story

 

Today's move by the Obama administration to put a $500,000 cap on the pay of senior executives at companies hoping for federal bailout money could force some big firms to rethink their pay packages.

 

I don't know why they would do that (restructure their pay packages). Isn't that just begging for trouble that isn't really there? Why would a company "rethink" its entire compensation structure just because of the possibility that they might be bailed out at some point in time?

 

And maybe more to the point, why would we care if they did? So what? It's not as if they lack incentive to become CEOs -- it's only in the event of a bailout that they would be capped. Doesn't this just give them more incentive to AVOID a bailout by doing better business?

 

It seems that way to me. I like it. And it's not in the least bit socialistic. It's MY MONEY, and if you're going to take it from me by force, then you're darn well not going to give it away to each other instead of using it to save the company that YOU'VE failed to make successful as you were hired to do.

[ParanoiA]

Yeah, I agree. It actually feeds the argument for capitalism, really. It's because we, the public, have a right to dictate such things when our money is being spent (against my will in the first place, but...) that creates the negative energy about national healthcare and related.

 

I don't care to be brow beaten by the public about my lifestyle choices because all of our money is forcibly pooled together by the government - a right the public should have since it's their money, as a collective. And it's because of this intrinsic expectation that runs many of us off from socialistic solutions.

 

To the OP though, I'm afraid this only appears to validate my suspicion that most corporations would be happy to be owned by the government. They already have experience in wasting money and bureaucracy worship and appealing to the lowest common denominator. They're almost the government, already.

 

After all, if the government owns the business, you can just legislate it a market. What corporation wouldn't like that?

[Sisyphus]

Sure, why not? You want a higher salary? Re-privatize your company by paying me back my tax dollars. Hell, they should be thankful. 500k is awfully high for a government salary...

[waitforufo]

The problem with these mandated caps is that the executives have contractual relationships with their companies. These are legally binding contracts approved by the company board of directors. Many of these contracts guarantee annual and/or quarterly bonuses based on specific measurable business metrics. So if the company meets those metrics, the bonuses must be paid.

 

Often times the metrics used don't guarantee the health of the company. A common example would be improving revenue without a companion metric for improving profit. I don't know why corporate boards do such things but the do them often. So to receive a bonus an executive can increase revenue by selling inventory at fire sale prices. Large sales mean large revenue but each sale can be at a profit loss. The executive still gets the bonus.

 

These contracts also generally include golden parachutes. That means if the executive is fired, they get a huge severance bonus.

 

So let's say the board agrees to receive a government bail out and to caps executive compensation. Well now they have to get the CEO to renegotiate his contract. If the CEO says "no thanks, I like my contract as is" what are the going to do? Well they could fire the CEO. If they do that the have to pay out on the golden parachute severance package. Most CEOs dream of the day their employer has to make a golden parachute payout.

 

Okay so they get fired and now they might have to accept a new job subject to the compensation caps. Well the big severance package should hold them over until the bail out restrictions are over. Then it will be back to the same old game.

[swansont]

The problem with these mandated caps is that the executives have contractual relationships with their companies. These are legally binding contracts approved by the company board of directors. Many of these contracts guarantee annual and/or quarterly bonuses based on specific measurable business metrics. So if the company meets those metrics, the bonuses must be paid.

 

Often times the metrics used don't guarantee the health of the company. A common example would be improving revenue without a companion metric for improving profit. I don't know why corporate boards do such things but the do them often. So to receive a bonus an executive can increase revenue by selling inventory at fire sale prices. Large sales mean large revenue but each sale can be at a profit loss. The executive still gets the bonus.

 

These contracts also generally include golden parachutes. That means if the executive is fired, they get a huge severance bonus.

 

So let's say the board agrees to receive a government bail out and to caps executive compensation. Well now they have to get the CEO to renegotiate his contract. If the CEO says "no thanks, I like my contract as is" what are the going to do? Well they could fire the CEO. If they do that the have to pay out on the golden parachute severance package. Most CEOs dream of the day their employer has to make a golden parachute payout.

 

Okay so they get fired and now they might have to accept a new job subject to the compensation caps. Well the big severance package should hold them over until the bail out restrictions are over. Then it will be back to the same old game.

 

Accepting bailout money is a way to not declare bankruptcy, which AFAIK would allow them to rewrite those contracts. IANAL, but I'd argue that the companies should have the same leeway to rewrite the compensation by taking the federal money.

 

Either that, or force them to declare bankruptcy and then go through all of this. They owe their creditors before they owe their executives bonuses for screwing up.

[waitforufo]

Accepting bailout money is a way to not declare bankruptcy, which AFAIK would allow them to rewrite those contracts. IANAL, but I'd argue that the companies should have the same leeway to rewrite the compensation by taking the federal money.

 

Either that, or force them to declare bankruptcy and then go through all of this. They owe their creditors before they owe their executives bonuses for screwing up.

 

I can't imagine that the government can create a new law to make existing legally binding contracts null and void. No court would uphold it. I think they would have to do the later (bankruptcy), but the whole point of the bail out is to avoid bankruptcy.

 

By the way I think CEOs that forced their current employers to pay the golden parachutes to accept bail out money would receive only praise within the business community. Their next jobs would probably just pay more. They would just move to companies not receiving bail outs.

 

I see this compensation cap as a PR gimmick to make the stimulus package more palatable to the public. I agree with the idea in concept, but it's application is impractical.

[Pangloss]

The government has the weight of law behind it, so clearly they're not going to pay those contracted bonuses if they enter into a new agreement that renders then void. If that's a problem then the CEO in question can sue, and the judge and the rest of us can laugh them out of court.

 

On another front, however, a friend of mine pointed out that this cap would prevent a company from replacing a CEO with a new one at an appropriate salary level. However, they could easily write THAT contract in such a way as to provide huge dividends if the new CEO rescues the company from bailout status, which of course is the whole point. And if they can't rescue them, then they shouldn't receive big compensation anyway. That seems to fit.

[DrDNA]

Salary caps??

This whole "bailout" is crazy. In the USofA, anyway.

 

It has the stench of something way far to the left of socialism.

 

In the "free market", it plays itself out......they go bankrupt and more economically viable businesses and/or business that know how to manage their finances take their places. And the displaced employees go to work for them.

We don't tell them how to run their businesses or how much or how little to pay anybody.

They do it in an economically viable manner or they go out of business.

If they operate within the boundries of the law, we leave them alone. If not, they are forced to shut their doors and/or go to butt pounding prison.

 

Buggy manufacturers were replaced by railroads and the auto industry because horse drawn buggies became obsolete.

 

Should we be bailing out buffalo hunters and the whaling industry too?

 

Any "stimulus package(s)" should focus on

unemployment benefits,

alternate fuels,

getting us out of Iraq,

primary education and 4-yr college education

and infrastructure (including tent cities in Death Valley so the crooks that ripped us off and the neocons that encouraged this to happen can be Bubba's girlfriend).

Those are what got us in this mess and those are the only things that are going to get us out of it.

Period.

 

What country did I wake up and find myself in?

Edited February 5, 2009 by DrDNA

[iNow]

Oh pull-eez. When did our membership become such a bunch of whiny drama queens?

 

Nobody is forcing anyone to take a bailout. These companies and CEOs are free to find a way to save their company on their own or to let them fail. However, if they DO want a bailout, it comes with some rules, guidelines, and restrictions to qualify.

 

 

Oh no! The sky is falling! I think this looks a little like something I heard socialism was like, and THAT's scary!

 

Give me a break. If they want the funds, they follow the restrictions which come with the funds. If they don't want those restrictions, then they can't have the funds. Yeah... that's SO far outside of the bounds of logic and reason.

[DrDNA]

However, if they DO want a bailout, it comes with some rules, guidelines, and restrictions to qualify.

 

Qualify?

My point is, bailouts shouldn't even be under consideration.

 

This whole thing reminds me of a scene in 'The Jerk'.

Where everybody and their brother were lined up looking for handouts from Navin after he got rich and he's too stupid to tell that they're just sucking him dry.

'The leather seats in my airplane are cracked (tears), I'm too embarrassed to take my friends to the SuperBowl

 

This is us:

l'.

[ParanoiA]

In the "free market", it plays itself out......they go bankrupt and more economically viable businesses and/or business that know how to manage their finances take their places. And the displaced employees go to work for them.

 

Not anymore. We bail them out now, while we're going broke. We must save everyone. I mean c'mon DrDNA, they have children. You're not going to save their children? You're just going to force them to look for another job? Or make some rich dude have to file bankruptcy? The horror...

 

Oh pull-eez. When did our membership become such a bunch of whiny drama queens?

 

I don't know when it started but it sure has been annoying listening to them justify bailouts with it.

 

Nobody is forcing anyone to take a bailout. These companies and CEOs are free to find a way to save their company on their own or to let them fail. However, if they DO want a bailout, it comes with some rules, guidelines, and restrictions to qualify.

 

You seemed to have missed the point. Force is not the issue. The fact it's even an option for a company to take is the issue. If you haven't been paying attention to where we were and where we are, then you won't understand why socialism is so obviously where we're going.

 

All our "resistance" can do is just try to slow it down. Nothing will stop it. The american people want to be taken care of like a collective. They do not value individuality, in fact, they resent detraction and demonize folks with different morality sets.

 

Look at how you treat religious folks - a total rejection of tolerance. I'm seeing more and more of that out of people. Intolerance for that which is ideologically consecrated to not tolerate. I'm not attacking you, I just mean that our modern discourse does nothing to help people feel comfortable in being different, and can only serve to help them feel comfortable in being the same. That's purely opinion, of course.

[iNow]

No, actually. I posit that you guys are BOTH wrong, and are mixing threads (although, ParanioA, I did like your point about ingroup/outgroup tendencies and assimilation with our internet based communications).

 

 

This thread is not about the virtues and costs of bailing out companies. We've got like 3 others of those right here on SFN where that point is being pummelled like a deceased equine.

 

This thread is about salary caps for companies receiving bailouts. The idea of bailouts is taken as a given for purposes of this particular conversation.

 

 

I know, it can be hard to differentiate... what, with it stated right there in the thread title, and all, but now you know.

 

I was not arguing for bailouts. I know you guys were arguing against them. However, you were both OT, and my comments will hopefully remind you of this.

[Phi for All]

The american people want to be taken care of like a collective. They do not value individuality, in fact, they resent detraction and demonize folks with different morality sets.

I disagree with this part. I think the average person simply resents the billions of dollars being given out for poor performance. They might see it as inevitable that the big guys will be untouchable and never have to take the kind of abuse the average person would have to take if they messed up as badly. Now they're just wondering, like some of the foreign car makers, what you have to do in this country to get ahead. Being honest and hard-working individuals isn't working as well as it used to.

[Pangloss]

This is us:

l'.

 

tYM5rRL5u4U

[ecoli]

@ inow - its hard to care about salary caps when you don't think bailouts should exist in the first place. I resent them on their own terms however because its just one more way government is trying to regulate (and Obama is doing this without legislative check and balance). It may or may not come up in the courts, but the fact that one person can make such a big decision (that isn't military) seems against the spirit of the constitution to me.

[iNow]

@ inow - its hard to care about salary caps when you don't think bailouts should exist in the first place. I resent them on their own terms...

Trust me, I'm not that far separated from your feelings on this.

 

 

because its just one more way government is trying to regulate (and Obama is doing this without legislative check and balance).

 

Please elaborate. IMO, the legislature itself wrote it in such a way that the funds could be used at the presidents discretion (while Bush was still in office). It's not that Obama is doing this w/o checks and balances, its that the people responsible for those checks and balances conceded their authority in the package itself... It's how they wrote and passed it. Ergo, it went through the proper check in the legislative branch, and I suspect that the issue here is more about your feelings regarding the outcome of that check than it is any true legal issue or problem with Obama.

Edited February 5, 2009 by iNow
clarified my intended point

[ecoli]

Please elaborate. IMO, the legislature itself wrote it in such a way that the funds could be used at the presidents discretion (while Bush was still in office). It's not that Obama is doing this w/o checks and balances, its that the people responsible for those checks and balances conceded their authority in the package itself...

So that grants Obama the power to attach his own strings to the bailouts?

 

Legally, the legislature is not allowed to grant the president powers that supercedes the constitution. I'm no expert in law, and I'm sure Obama is not breaking any, but it still smells fishy to me.

 

I suspect that the issue here is more about your feelings regarding the outcome of that check than it is any true legal issue or problem with Obama.

I suppose so...

[iNow]

I suspect that the issue here is more about your feelings regarding the outcome of that check than it is any true legal issue or problem with Obama.

I suppose so...

 

And again, here we can relate. Cheers, man.

[john5746]

I don't know why they would do that (restructure their pay packages). Isn't that just begging for trouble that isn't really there? Why would a company "rethink" its entire compensation structure just because of the possibility that they might be bailed out at some point in time?

 

So they can guarantee pay to top prospects regardless of the financial situation would be one reason.

 

And maybe more to the point, why would we care if they did? So what? It's not as if they lack incentive to become CEOs -- it's only in the event of a bailout that they would be capped. Doesn't this just give them more incentive to AVOID a bailout by doing better business?

 

It gives the CEO more incentive to have a nice parachute clause so he can jump ship before the bailout.

 

I think something like this needs to be done, but it seems too drastic to me.

[ParanoiA]

To be clear, I did address the OP in my post #2 that I agree with capping their pay, and in fact, would prefer a salary cap for all positions in the company upon review - for those that receive any bailout. When it's my money, then it's my terms - or our terms, as it may be.

 

I was trying to make an argument for capping pay while not endorsing the concept on its face. I reject the bailout solution, but if I'm forced to accept it, then I definitely think we have every right to stick our noses in every part of their business. In fact, I'm not sure why we stop at salary caps. And I would require that we enjoy the relative profits as well, once the company regains footing - in the form of a check for every tax payer.

---

Merged post follows:

Consecutive posts merged

I disagree with this part. I think the average person simply resents the billions of dollars being given out for poor performance. They might see it as inevitable that the big guys will be untouchable and never have to take the kind of abuse the average person would have to take if they messed up as badly. Now they're just wondering, like some of the foreign car makers, what you have to do in this country to get ahead. Being honest and hard-working individuals isn't working as well as it used to.

 

Well, I'll take the blame for this since this is a response to my off topic post. When I was rambling on about my socialist phobia it wasn't actually within the context of salary capped bailouts - it was a generalized whine fest.

 

Honestly, I'm not sure why conservatives have an issue with this. I can see the issue with bailouts in general, but I'm not following their resistance to capping salaries for companies that we save from bankruptcy. I heard Mark Steyne yesterday, super funny guy, talking about how symbolic it is and is just pennies in comparison.

 

First of all, that's an affront to taxpayers to dismiss millions of dollars, particularly when we're as broke as we are now, as pennies. Second, it's entirely irresponsible to reward failure and use our bailout money to do it. It's just common sense. Even if we were talking about literal pennies it would stand. I think most americans get that without accessing anything in the way of higher brain functions - it's just above tying your shoes.

 

So, all that to say I agree with you within the context of the bailouts. However, off topic as it may be, I do believe our country eventually will transition to socialism, or at least some dramatic form of collectivism at the expense of individual empowerment in the market place. Hopefully I'm wrong. Or maybe it's just a swing of the pendulum that has to happen. Our country has enjoyed freedom and essential individual liberties for so long, it may simply be a matter of needing a reminder of the disadvantages of state primacy.

[iNow]

For someone who speaks so powerfully against the idea of socialism, I must admit that I found your comment below a bit shocking.

 

To be clear, I did address the OP in my post #2 that I agree with capping their pay, and in fact, would prefer a salary cap for all positions in the company upon review - for those that receive any bailout. When it's my money, then it's my terms - or our terms, as it may be.

 

I was trying to make an argument for capping pay while not endorsing the concept on its face. I reject the bailout solution, but if I'm forced to accept it, then I definitely think we have every right to stick our noses in every part of their business. In fact, I'm not sure why we stop at salary caps.

 

Leaving aside my shock, let me address the operational aspect of this idea.

 

Ever heard the phrase "death by committee?" Thinking of my own work, I know that we sometimes limit ourselves to "tiger" teams, where we put a few bright and able decision makers in place to drive a process forward, with only the occasional check point for overview and status update. We do this, because through experience we've found that getting too many sources of outside input ultimately kill the program... The more people we involve (as a general rule), the more their competing interests ultimately kill the project... We wind up "n=Nickling and diming" it to a hollow and worthless change.

 

I'm okay with capping the CEO, and also the other senior executives, and potentially driving what the milestones should be for progress (like asking Detroit to build greener cars, etc.), but that's about as far as I'm willing to go right now.

 

Interesting that you consistently speak more against the idea of socialism than I do, yet you are willing to go farther with government control of the company in this approach than me. Strange juxtiposition, that.

[swansont]

So that grants Obama the power to attach his own strings to the bailouts?

 

Legally, the legislature is not allowed to grant the president powers that supercedes the constitution. I'm no expert in law, and I'm sure Obama is not breaking any, but it still smells fishy to me.

 

What is purportedly unconstitutional about the salary caps?

[ParanoiA]

Leaving aside my shock' date=' let me address the operational aspect of this idea.

 

Ever heard the phrase "death by committee?" Thinking of my own work, I know that we sometimes limit ourselves to "tiger" teams, where we put a few bright and able decision makers in place to drive a process forward, with only the occasional check point for overview and status update. We do this, because through experience we've found that getting too many sources of outside input ultimately kill the program... The more people we involve (as a general rule), the more their competing interests ultimately kill the project... We wind up "n=Nickling and diming" it to a hollow and worthless change.[/quote']

 

I'll certainly concede to your judgement here. I didn't mean to imply a method of operation, I was speaking to the notion of our right to interfere when using our money to save themselves from bankruptcy.

 

I see no reason to stop at salary caps for CEO's, in terms of what we have a right to demand from them. But by all means, we should only demand and interfere using a methodology that works. If it's not smart to go any further than that, then sure, stop there. I just think we're justified in going further, should we decide that we want to, for whatever reason.

 

As far as the shock, it only seems logical to me. That's what I was trying to say in post #2. When the american public, as a collective, is a forced investor via bailouts or whatnot, then that collective has every right leverage their demands with proportion to the rest of the investors, if not more. If we basically purchase 30% of a company through a bailout scenario, then we should get 30% of the say-so effectively - we are investors now.

 

It's because of that logic, which I believe to be intrinsic to some degree, that I resist socialism in the first place. I don't want to be subordinate to the masses in the market place. I don't want national healthcare because I don't want my hip replacement surgery to be dependent upon the approval of the collective. Because the public has a right to interfere when it's their money forcibly pooled into such an arrangement.

[iNow]

We're pretty well aligned. What would you think if the populace were given a "seat" and a vote on the Board of Directors? Basically, the board votes every quarter on what to allow and what initiatives to follow, and we somehow can "text our votes" for one of the available options if they took a bailout from our tax dollars. Our votes are then aggregated into "One Vote" and that gets added to the hopper. The board then casts their votes, ours is included, and we influence the outcome, but don't dicate it.

 

I haven't thought that through. It's just something that came to me while reading your response.

[ParanoiA]

Honestly, I don't think I'm qualified to have an opinion on the particulars like that, but I won't let that stop me from at least answering your question to say yeah, it certainly sounds like a great idea. Structurally it fits the investor role very well, I think.