Friday November 20th, 2009

Our New Paymaster?

Investor's Business Daily | Last Modified: 2009-11-20 21:33:34

As a part of its plan to reorganize regulation of the financial industry, and in response to the frenzy over the AIG bonuses, the administration reportedly is thinking about giving Washington oversight of executive pay. The federal supervision would apply to executives at all banks and other financial institutions, and could be extended to other companies.

Put aside the fact that administering executive salaries isn't a legitimate function of government, and consider the effect that doing so would have on the economy. What will be the reaction from execs if Washington becomes their paymaster and de facto boss?

Some will move their companies overseas where they won't have to deal with the problem. Don't believe it? Some oil companies, made villains during last year's run-up in prices, are already doing so. There's no economic stimulus in that, except for the country or nation-state that becomes the new corporate home.

Others might simply quit -- go John Galt or just go fishing -- leaving lesser talents earning lesser salaries to run the companies. That is not an arrangement that would move the economy forward.

As John Tamny wrote in IBD in December, quality CEOs are priceless. A willingness to work for less is an admission that the skills needed to make a company successful are lacking. Companies need the executives who are capable and know it. Poorly run companies don't just suffer alone. Their failures and weaknesses are felt throughout the economy.

Setting executive pay might soothe some tattered feelings during a downturn, but no bureaucracy is equipped to determine what is fair compensation for any worker, from CEOs down to janitors.

Attempts to set or limit pay will run into the same problems the federal apparatus encounters when it gets involved in the pricing of goods. It cannot possibly sift through all the signals of a complex economy and set prices that are fair to all parties.

There's no denying that some executives have been poor stewards of the companies they run. But while a few have failed, far more have quietly prospered, creating wealth for shareholders, providing secure jobs and making rich contributions to the economy. Punishing all, or even just a few, with pay caps for the sins of a small minority is counterproductive.

Washington has better things to do than micromanage executive pay. Among those would be getting out of the way and letting the private sector pull the economy out of its slump.