The Eastern New Mexico News - Serving Clovis, Portales and the Surrounding Communities

Government flex of power going too far


June 18, 2009

Freedom New Mexico

Even though there’s a certain amount of populist pandering involved, you can understand the impulse behind a government move to limit the pay of top executives at companies that have taken bailout money from the taxpayers.

He who pays the piper and all that.

There may be some danger of losing talented executives to other companies willing to pay more, but it does seem a little incongruous to pay really big bucks to executives who managed or mismanaged their companies to the point that a bailout was required.

But the Obama administration is going well beyond a desire to manage taxpayers’ money prudently with a proposal designed to limit executive pay at shareholder-owned companies that have not taken bailout money. That represents an arbitrary and unwise government intervention into private corporate governance.

The administration proposal is less onerous (and probably less effective) than some of the original announcements suggested it might be. The plan would give shareholders a non-binding vote on top executive compensation. In addition, compensation consultants who advise boards of directors would be required to be more independent of the boards and top executives than some of them are now.

Those are not bad ideas in and of themselves, and we would probably advise some corporations to adopt them on their own. But having them required by government represents yet another layer of government control that is more likely to generate additional paperwork and compliance headaches than to improve corporate efficiency.

This is not to deny that some top executives have received compensation that seems way out of line, especially at companies going into the tank. But excessive executive compensation is a problem (insofar as it is a real problem; in many companies it isn’t) that has been building for a long time.

Back in the 1930s, economist Adolf Berle noted that in publicly-traded companies there are incentives for managers to act more in their own interests than in the interests of their shareholder-owners.

In a marketplace economy the phenomenon ebbs and flows. Average compensation for CEOs at the 50 largest financial firms, for example, fell 25 percent from 2007 to 2008 as problems became apparent. Losing money tends to concentrate the attention of compensation committees.

In a market economy the “right” price for any good or service is not what is calculated by a committee of reputed experts, but the price that emerges from the interplay of market forces.

Unfortunately, the Obama administration seems determined to move us away from a market economy and in the direction of a command-and-control economy with command centered in Washington.

That road leads to stagnation rather than prosperity.


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