House tries to limit executive compensation - Apr. 1, 2009

House tries to limit executive compensation - Apr. 1, 2009

I'm not really sure what to think about this latest piece of legislation. The taxpayer has expressed outrage over the AIG compensation, there is tremendous frustration at how the bail out money is being spent by the banks, and there is a huge sense of nervousness walking into the auto industry bailouts. There is more pressure on the politicians to "govern" businesses then I have ever seen in my lifetime.

Should taxpayer ire determine what the right legislation and the right governance is around those that receive the stimulus and bail out money?

I definitely think that those that abused or skirted laws meant to protect this nation should be penalized for their behavior. Markets can't determine what is morally ethical, they can only determine the right prices and through the Darwinsim process that is capitalism, weed out those that are too weak to survive in cut throat competition. It is the government's role to ensure that businesses do not profit at the expense of the greater good.

Example: if a business were built on sending children into mines that were not fit for adults to enter, and that business made tremendous profits of that labor force without regards to risk and/or proper compensation, that should be regulated. I don't think anyone would argue against this.

Where the water gets murky is the situation we are in today. Things are rarely black and white.

Today, the government is trying to do the right thing. The companies that are being bailed out do not deserve to have inflated incomes; they could not survive on their own. They took on too much risk, or they made very shoddy business decisions, and now, they are failing.

In an unfortunate scenario for the tax payer, these companies are “too big to fail" and the assessment of the experts is that if there were no intervention, the world economy would suffer beyond what we are seeing today. The only recourse was to invest or loan or grant enormous amounts of funds to these organizations in order to protect us, the taxpayers. But at that point, what is done with that money becomes the problem, and there are not any easy answers.

In a normal situation, a VC, a bond holder, or a bank would provide capital and elect a board to manage their investment. That board would need to hold the shareholders and the bond holders’ interests in mind when big decisions are being made. BUT, the key is that they know their role. A wise board may not get involved in the day to day administration of a company if they do not have a strong understanding or expertise in the core functions of the company. They will hire the right CEO, the right executives, who in turn will hire their teams to try to maximize the company’s profits. They will try to incentivize those employees through multiple channels, compensation, opportunities, benefits, perks, community, etc.

In the situation we have today, there were bad seeds that ruined the company’s chances to perform optimally, the business failed on of bad strategy, acceptance of inordinately high risks, and/or a combination of the two. Now, the government steps in to play to role of the VC, the bond holder, or the bank. They are putting their boards together, and then trying to determine what type of governance they need to hold those that are hired into, or remain at the company accountable.

The first reg that was proposed was a 90% tax on all non performance related bonuses; the second is to ban all bonuses that are not performance related.

The problem with all of this is that how do we know that these regs are going to ensure that the company is doing the right thing with the capital that has been infused? Do these regs ensure that the money will be managed in the best manner to ensure that the company does not fail? How do we ensure that these companies wisely manage their businesses when they did such a piss poor job of it the first time around?

I don't have a straight answer, but I am very leery of over regulating businesses. The market does one thing very well, it weeds out the weak. If there is any additional burden placed on a business that allows a competitor to take advantage of the situation, it will happen and failure is much more likely. That is how the system works. You can't legislate those companies that have not taken on government bailouts, if you do, you are essentially building a socialist system. I don't think that is what the U.S. needs.

I don't want bonuses to be paid out for those folks that made a mess out of these companies, but if there are employees much further down the food chain that got a bonus for moving their family from the east coast to the west coast, and might help the company get back on its feet, how do we know that bonus will be allowed, how do we know that this reg prevents the ability from attracting the right talent? Any change in compensation has an impact, you don't know how people will react to these type of situations.

I think there needs to be more discussions on how to manage this situation. We'll see what happens.