Keep pay within reason

WE SAY Adjusting compensation if it’s too high is the right thing to do.

Starting Aug. 13, the Obama administration’s pay czar, Kenneth Feinberg, will be reviewing how compensation should be structured at seven companies that received two or more federal bailouts, according to the New York Times.

After reviewing the compensation plans of the top earners at each of these companies, Feinberg has the “right” to change those plans.

The issue of AIG giving out its scheduled bonuses inflamed taxpayers earlier this year. Because of being understaffed, U.S. Treasury Secretary Timothy Geithner and his department failed to handle the issue before the checks were signed. Feinberg, however, will have ample time to review these plans – 60 days for the top 25 earners – and make any changes before an angry public finds out too late.

The Times captured the problem best: “The resurgence of bonus guarantees underscores just how difficult it is to control Wall Street pay, despite the public outcry over how taxpayer money is being spent.” Is Wall Street going to overcompensate pay again only to have the markets go sour? Or are such bonuses needed to attract and retain top performers? Also, if we should allow bonuses, what’s fair or tolerable?

There are certainly people who will make the argument that these executives are being paid fairly – after all, people are paid what they’re worth, right?

Well, we assume that prices send meaningful signals. Specifically, if people are only willing to pay what something is worth to them, then prices should represent value fairly well. However, this isn’t always true. Remember the start of this whole mess was a bubble. And the insular nature of Wall Street creates friends assigning friends’ pay. Unfortunately, stockholders haven’t cared to scrutinize these earners’ pay or haven’t been able to get enough push on their own to change it.  

Now, taxpayers have become large shareholders in these companies – whether that is a good thing or not. Like any responsible shareholder, government should take an active role in the company’s performance and business. If pay is supposed to be linked to performance, then it’s clear that the salaries of these top earners were bloated.

There are plenty of people who can do what these men do (at the least, run a company into the ground) and are willing to do it for less.

DISSENT: Despite all the sound and fury of objections to compensation on Wall Street, what many fail to grasp is the basic nature of how compensation works. The much-maligned idea that bonuses are necessary to retain top talent is as true as it is painful to hear. Talented executives at failed companies, where many didn’t have anything to do with the crisis, already have a myriad of reasons to jump ship. If the government limits their compensation, it simply gives them further encouragement and practically dooms the companies we have propped up.

The argument that executive compensation is too much misses that companies actually have an incentive to pay their workers as little as necessary in order to keep them working. Bonuses are just one more cost, and every company seeks to keep costs low. But above all, we have to resist making arbitrary judgments about what companies “should” pay; otherwise, we might all end up with an equitable share of a ruined economy.