Obama's Executive Pay Move Is Bad Policy

The Obama administration has finally crossed the executive-pay Rubicon and declared war on Wall Street. A few months ago, President Barack Obama sent mixed signals, initially blasting groups such as AIG that were receiving government aid for paying large bonuses, and later pointing out the need for productive people at these companies to be paid competitive salaries and bonuses, since they could leave for brighter pastures. This, he argued, would not be in the interest of the assisted institutions, the economy or the companies' stockholders (including US taxpayers).

As Robert Lucas, a Nobel Laureate, once famously informed his dean at the University of Chicago: "You don't get to decide my salary, you only get to decide who pays my salary."

But now the administration has taken a different tack. Mr Obama will cut compensation for the highest-paid 25 employees in the seven companies still receiving government aid (AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial, General Motors, and GMAC) by about 50 per cent and cut cash compensation by 90 per cent.

The Obama administration appears to be engaging in political payback to silence critics of its financial reform proposals.

Kenneth Feinberg, the "pay tsar", will also micromanage the structure of stock bonuses and eliminate perks that he regards as excessive. He has also decided that retention bonuses for other employees at AIG need to be scaled back "to avoid another public uproar over pay packages at the bailed-out company".

Just a couple of weeks ago, there were reports the tsar gave his blessing to a pay package worth up to $10.5m (£6.4m, €7m) for Robert Benmosche, AIG's new chief executive. Now it seems he will be exempted from the new pay policies, but almost everyone else at AIG will not. Many people at Bank of America who thought they had a deal just a few weeks ago are finding it has changed. All the pay decisions were made on a case-by-case basis by the tsar, with no explanation or transparency.

What is driving the timing of this amazing policy change? It is important to differentiate the switch in White House policy from the pay oversight policy announced by the Federal Reserve. Changing the structure of pay to ensure incentives are aligned with risk management makes sense. Compensation is an integral part of risk management and its structure should be subject to regulatory oversight.

But that has nothing to do with this shift to cut executive pay at the assisted companies. There are two obvious explanations. Polls show Mr Obama's popularity is sliding--he needs to shore up his base and find an issue with broad populist appeal. Executive pay is the most obvious candidate. Many Americans hate big banks and take pleasure in seeing them attacked. Second, the Obama administration appears to be engaging in political payback to silence critics of its financial reform proposals.

For the record, I support many of the administration's financial reform initiatives, although I think even the good ideas need to be polished and that they have not proposed meaningful reforms for two of the key contributors to the crisis: government housing finance policies that subsidised extreme mortgage risk-taking at the Federal Housing Administration, Fannie Mae and Freddie Mac; and the failure by prudential regulators to measure bank risk adequately owing to their reliance on banks' risk models and rating agency opinions.

Whatever the merits of the administration's proposals, we live in a democracy, where lobbying by special interests is how voices are heard and balanced against one another by officials. Lobbyists are not criminals deserving of punishment through the use of the pay-setting executive powers of the president. Indeed, citizens of democracies should be uneasy about appointing "tsars" to decide who gets paid what, and all the more so when those decisions reflect power politics.

We can ill afford to cripple these companies at this key juncture, when managerial skill is so crucial to their getting back on their feet.

The attack on Wall Street may be smart politics for an embattled administration losing ground with voters and losing support for its financial reform agenda, but it is bad economics. It is also a worrying precedent for our democracy. More than the specific fallout from this bad policy decision, I worry about what it implies about the administration's decision-making more generally as it faces other important economic policy decisions.

Charles W. Calomiris is a visiting scholar at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Charles W.
Calomiris

What's new on AEI

We still don't know how many people Obamacare enrolled
image The war on invisible poverty
image Cutting fat from the budget
image Speaker of the House John Boehner on resetting America’s economic foundation
AEI on Facebook
Events Calendar
  • 22
    MON
  • 23
    TUE
  • 24
    WED
  • 25
    THU
  • 26
    FRI
Monday, September 22, 2014 | 2:30 p.m. – 4:00 p.m.
Policy implications of the new US labor market normal

We welcome you to join us as a panel of economists discuss US wage and price prospects in the coming months and the implications for the Federal Reserve’s current unorthodox monetary policy.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.