In his first week as president, Barack Obama cited years of “greed and irresponsibility on the part of some” as a major contributing factor behind our economic meltdown. In his second week, he denounced Wall Street’s latest round of multibillion-dollar bonuses as “shameful.” In his third week, he proposed what amounts to a “maximum wage,” a $500,000 cap that would apply to at least a few banking executives lining up for a share of the exceptionally large TARP bailout.
So what can we expect for an encore? When he announced his executive wage cap, Obama gave us a clue. The president promised to launch a special “long-term effort” to examine “broader reforms” around executive pay.
Presidents typically convene such “long-term efforts” to kick the public policy can down the road until an energized public loses interest. Let’s hope this one proves different. We desperately need a sober, thoughtful review that can get us past the muddled clichés that dominate the CEO pay debate.
Obama’s remarks so far, unfortunately, have done precious little to clear up matters. At one point in his announcement, he seemed to swallow whole the conventional take that stratospheric pay levels are just fine as long as executives are meeting the criteria for performance “success” as corporate boards so narrowly define them. “This is America,” Obama observed. “We believe that success should be rewarded. But what gets people upset–and rightfully so–are executives being rewarded for failure.”
But other comments by the president hint at a much deeper understanding of the danger inherent in the enormous rewards that have metastasized across corporate America. “Lavish bonuses,” Obama noted, are enabling a “culture of narrow self-interest and short-term gain at the expense of everything else.” Executive pay excesses “have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system.”
So what should we be battling: rewards for CEO “failure” or “lavish bonuses”? The answer makes a difference.
If the problem does boil down to paying for failure, then we ought to empower shareholders. Give them a “say on pay”–the right to take advisory votes on executive pay packages–and, mainstream reformers claim, corporate boards will end their wasteful ways.
But if the problem revolves around the size of the rewards, then the solution demands more robust government action. Obama’s $500,000 cap moves us a tiny, mostly symbolic step forward. Gaping loopholes abound. The cap applies only to failing firms that in the future will receive vaguely defined “exceptional assistance.” And even these few firms will be able to reward top execs with unlimited millions in restricted stock they can claim once the firms repay the government. Shouldn’t the rewards go first and foremost to the taxpayers, who are bankrolling recovery?