President Obama recently proposed an executive pay limit of $500,000 for companies receiving significant amounts of federal bailout money.
This is a shrewd political move on Obama’s part appealing to the pervasive disgust of corporate greed in this country, but will do little to encourage any substantive change. It could also yield a wave of unintended consequences.
At first glance, punishing the executives who are largely responsible for this economic crash feels right and just. Wall Street had its worst year in at least a decade but still shelled out $18.4 billion in bonuses, the sixth highest annual bonus rate on record. It sounds blatantly unfair, but the truth is that now is not the time for punishment.
Many believe it’s unfair for executives to benefit from taxpayer money even as these companies slide into financial ruin. But they are not responsible for the way Wall Street works. People don’t go to Wall Street to save the world; they go there to make money.
Not only will the pay cap drive out brilliant executives who are desperately needed right now, incoming executives will have subpar experiences and skills.
Companies like American International Group Inc. are hemorrhaging top talent to places like China and the United Arab Emirates every day. Executives limited to $500,000, when they could make ten times that elsewhere, don’t have much incentive to stick around.
Consider this: Both company A and company B have horrendous years. Both lose lots of money. Company A seeks to hire new executives and will compete to pay competitive wages. Company B keeps the same executives but decides to pay them a fraction of the salary they could get elsewhere. Which company do you think will do better?
Why is the United States government banking on company B?
Layoffs are more effective than salary cuts because they allow companies to choose which employees they can afford to lose.
How about new regulations, new incentive programs or increased oversight to make sure this kind of disaster doesn’t happen again? This plan will cripple capitalism, which is the cornerstone of America.
Instead of placing a burden on the handful of executives that can actually fix the economy, the government needs to innovate ways to actually fix the financial system.
Tyler Zodrow is freshman business major form McKinney.