Western Standard

The Shotgun Blog

« Canada needs a radical approach to free trade to stimulate the economy and guard against protectionist retaliation | Main | Free trade, free choice »

Friday, February 06, 2009

Terence Corcoran on Barack's big ideas for restoring confidence

When US President Barack Obama announced a $500,000 limit on high-level executive pay at firms receiving government assistance, Western Standard associate editor Terrence Watson didn't think it sounded like such a wise plan:

Can you say "unintended consequences"? Chasing skilled executives away from companies that are already in trouble seems like a GREAT idea.

Terence Corcoran, editor of the Financial Post, agrees:

A Washington-led campaign, spearheaded by the President himself, to impose populist controls on the compensation of executives at all public companies, not just bankers, is about to take hold. Canadian bankers are already covering their tracks, with self-inflicted compensation reductions. “It’s only the beginning of a long-term effort,” Mr. Obama said.

Great populist strategy, but like all government price controls, the $500,000 Obama compensation plan for bankers is guaranteed to produce a rash of destructive consequences.

If the big idea in executive compensation is that the incentives were all wrong, what exactly is the incentive impact of forcing executives to work for less than they can somewhere else? The greatest risk is that the very banks the government is trying to save will face an exodus of talent just when they need talent most.

University of Chicago compensation expert Steven Kaplan, in an interview yesterday, called the plan “ill-advised” and “very dangerous.” He predicts a “mass exodus” over time as employees leave in search of higher cash compensation elsewhere. [...]

At AIG, the insurance company, there is evidence that executives at healthy branches of the company, now under de facto government control, are fleeing for other, healthy insurance firms. “You will see over time a huge exodus from the companies that take money from the government.”

At banks such as Bank of America, executives of healthy parts of the company will have many options. “Strange as it sounds,” said Prof. Kaplan, “$500,000 is way below what they can get elsewhere.” Another complication is the internal corporate inequities that will emerge if the top 30 executives are frozen at $500,000, while others in lower levels earn more. [...]

No wonder investors have yet to regain confidence in the U.S. financial system and the stock market.

Barney Frank, the influential chairman of the House Financial Services Committee, said yesterday that "Congress will consider extending the $500,000 salary cap to executives of all financial institutions and perhaps to all U.S. companies."

If this salary cap is really "only the beginning," and Obama will continue the bailouts and seriously consider applying these sorts of major structural changes to the entire economy, the time has come to think seriously about what economist and historian Robert Higgs calls "regime uncertainty," which "pertains above all to a pervasive uncertainty about the property-rights regime — about what private owners can reliably expect the government to do in its actions that affect private owners’ ability to control the use of their property, to reap the income it yields, and to transfer it to others on voluntarily acceptable terms."

Because, as Higgs meticulously documents, businessmen and investors in the 1930s didn't know what sorts of significant changes might be sprung upon them at any time -- and because those changes could undermine the free-enterprise-based economic system and threaten the safety of their capital, investments predictably dried up, resulting in a lengthening and deepening of the Great Depression.

Posted by Kalim Kassam on February 6, 2009 in U.S. politics | Permalink


It's simply smoke and mirrors, just like O's promise to tax the rich. Except the rich don't depend on salaries to be rich.

"Forbes categories of compensation

The categories that Forbes use are (1) salary (cash), (2) bonus (cash), (3) other (market value of restricted stock received), and (4) stock gains from option exercise (the gains being the difference between the price paid for the stock when the option was exercised and that days market price of the stock). If you see someone "making" $100 million or $200 million during the year, chances are 90% of that is coming from options (earned during many years) being exercised.

Typical compensation

The typical salary in the top of the list is $1 million - $3 million.[3] The typical top cash bonus is $10 million - $15 million.[4] The highest stock bonus is $20 million.[5] The highest option exercise have been in the range of $100 million - $200 million [6]."

Posted by: DJ | 2009-02-06 8:54:14 PM

"Chasing skilled executives away from companies that are already in trouble seems like a GREAT idea."

Skilled executives? Whoa, these are the dimbulbs who drove their companies into such dire straits that they had to beg the government for vast sums of taxpayers' money for mere survival. $500,000 p.a. sounds like pretty good pickings for people who should have been summarily fired or, in a few instances, thrown into jail.

Posted by: Realist | 2009-02-06 9:02:53 PM

Barrack Hussein Obama is a smooth talking idiot.

Posted by: Brian Mallard | 2009-02-06 10:44:05 PM

"Hope" a meaningless emotion that is rooted in vague future expectations.
"Change"...well, Castro had an idea like that too, but at least he was honest about the changes he had in mind.
This guy is just another empty suit/talking head and Boy! is the American public going to go ballistic when they get this one figured out...and they will.

Posted by: JC | 2009-02-06 11:21:41 PM


I'm not dismissive of hope as a powerful and meaningful belief. But when someone starts expecting politicians to make their life better, they are likely to create serious problems for themselves and others.

Posted by: Kalim Kassam | 2009-02-06 11:53:21 PM

Capping salaries for anyone is wrong, but maybe it should start with ex-politicians and their lobbying family members. Then the Hollywood elite. Would a troubled company be able to hire an expert in rescuing banks in trouble at that rate?

Posted by: spudmom | 2009-02-07 6:38:57 AM

I'm not dismissive of hope as a powerful and meaningful belief.
Posted by: Kalim Kassam | 2009-02-06 11:53:21 PM

Neither am I. But when I have "hope", it is more in the direction of "I hope the government doesn't steal every dollar I have or devalue it so completely I can never retire" "I hope I get to kiss my wife at the top of the Eiffel Tower someday" "I hope I get to travel to Peru and meet some of the kids we have been putting through school there"

But for the leader of the (so called) free world to tell us we should all be willing to live in suspended animation with the mere "hope" that things will get better is absolute Bullshit.

Which is why I "hope" that people will wake up and see this charade of smoke and mirrors for what it is....and "change" it.

Posted by: JC | 2009-02-07 7:14:20 AM

I thought it was all hype, but now I'm actually starting to think the U.S. can be a good country. Years ago, the Green Party in the U.S. was supporting the idea of a "maximum wage". Maybe someone can buy into the dumb idea that those people "earn" the right to be rich simply because they went to business school to learn the finer points of socio-pathic self interest and manipulation, instead of learning to do something useful, but there has to be a limit. Business has gained too much control, they have become a level of government and even admit as much these days. Their control over media has to end too.

Posted by: Daniel Johnson | 2009-02-07 8:17:34 AM

To reiterate a point already made: if they are "skilled executives", why are their companies in bankruptcy? I could run their companies into the ground for a lot less than half a million...

Posted by: BillBC | 2009-02-07 8:35:20 AM

I say these criminals in government are deliberately trashing the economy. Probably in order to start a new Keynsian bubble...

Here's just one (of many) examples given by some reasonably objective journalists...


Posted by: JC | 2009-02-07 9:05:35 AM

So for all the people here who think this is a great idea (and the "business school automagically makes you an executive" crowd), what do you think is the "fair" cap for whatever it is you do for a living? Keep in mind this is only hypothetical because there is no way it would be up to you, that's what voting is for right?

Posted by: Ray K. | 2009-02-07 9:15:02 AM

Ray K.:

Suggesting that we or the government should have any say whatever in salary caps is to accept what has become traditional socialist dogma.
There is no way these companies should be getting "bail outs" in the first place which would negate any say in salaries.
These "professionals" should be out of a job with no salary...let alone a cap.

Posted by: JC | 2009-02-07 9:24:09 AM

That word "talent" comes up a few times in this article. If these people actually were "talented" they would not need bailouts in the first place.

Posted by: glen | 2009-02-07 11:23:10 AM

Agreed, but it's still worth commenting on the cap. The second stupid government action can't be justified by the first.

Posted by: Ray K. | 2009-02-08 7:40:51 AM

The key problem is that Obama and Congress are threatening to IMPOSE salary caps on American industry, instead of making salary caps a condition that must be voluntarily agreed to BEFORE a company can receive bailout cash. That's what makes this idea so damaging. It's not the salary caps themselves per se. It's the way the US government's mercurial decision-making INCREASES uncertainty in the economy. It's uncertainty that causes depression, not accountability. If rules are applied fairly and everybody knows the rules in advance, then the rules themselves aren't necessarily the problem. But if the government can change the rules on a whim according to public opinion, that creates a huge disincentive for individuals to invest in private enterprise.

Posted by: anonymous | 2009-02-10 12:22:36 PM

The comments to this entry are closed.