Executive pay has been in the news a lot lately. First, the CEO’s of the Detroit’s Big Three automakers hypocritically flew private jets into Washington to ask for federal bailout funds. Then it was discovered that many executives working for federally bailed-out banks received huge bonuses in 2008 – the year their banks almost failed. So on February 4, President Barack Obama capped executive salaries at $500,000 for all firms receiving “extraordinary assistance” from the government. Though hailed by many as a move in the right direction, the decision has many negative far-reaching effects. For starters, it sets up the precedent that making scapegoats and limiting their freedoms is the correct course of action for future government policy.
Limiting executive pay compensation was an unnecessary step for the federal government to take in the first place. The stockholders of these companies are very upset at the pay packages being given at the expense of their companies’ performance. Many of them are now insisting that they have a vote on executive pay packages. In the past month, such corporate conglomerates as Intel Corp., Hewlett-Packard Co., and Occidental Petroleum Corp. have all given shareholders a vote on their executive pay policies. Besides, it is the stockholders who know how their company is running and what kind of reward its executives should receive based on their performance. A limit of $500,000 seems to communicate to executives that their performance doesn’t matter – whether the company fails or flourishes, their pay will be the same.
And for many executives, $500,000 is an awfully low salary. Author Holly Peterson, in an article for The New York Times entitled “You try to live on 500K in this town” says many executives in Manhattan who earn $2 or $3 million end up with no money left at the end of the year. She says that to many executives, a salary reduction to $500,000 “means taking their kids out of private school and selling their home in a fire sale.” And while private schools may sound like a luxury, many parents choose to send their children to them out of care for their children’s education. Obama himself sends his daughters to a private school where tuition is upward of $20,000 per child per year.
At the same time, a salary of $500,000 restricts executives from using chauffeurs, whose pays range between $75,000 and $125,000 per year. Chauffeurs are essential for corporate executives because running a company is a 24/7 job and executives need to be available at all times in case of company emergencies. Obama is the same; whether or not the country is failing, he needs to always be available, including on the road. The country, just like any company, needs to have its chief executive always available. Who’s to say that his ability to have a chauffeur – and therefore be available to handle crises on the road – should be taken away if the country isn’t doing well?
Sadly, one of the reasons executives are getting such harsh treatment is because they are being used as scapegoats for the country’s current financial crisis. While they may have had a part in it, there are other causes such as private investors and government policies that have gone unpunished. Now, new corporate executives hired after the crisis will have restrictions placed on them due to something they had nothing to do with. But it’s easier to restrict executive pay across the board than admit that there may have been other causes of the financial crisis.
What’s more is that salary caps are setting a dangerous precedent for future economic policy. There will certainly be an increasing number of companies receiving government aid as the $789 billion economic stimulus bill moves through Congress. The government may soon want the these companies receiving stimulus funds to ensure that their executives don’t get “overpaid” by restricting their pay to some arbitrary level. Government would then be restricting the freedoms of both these executives to earn a wage worth their work and the companies to hire better executives at a higher price.
Worse yet is that government is targeting a small group of people who cannot fight back. Corporate executives are a minority group of people because there are so few of them. And as minorities, they have no voice if they are harassed. Right now, their lifestyles are being overturned at the hands of the majority and in the name of justice.
Making a small group of people a scapegoat and then punishing them is not a sign of good leadership but an omen of bad things to come. Should this precedent be applied on a grander scale — as any stimulus plan would likely demand — freedom will become less and less available to American companies. Let’s hope the Obama administration stops restricting American citizens’ freedoms and starts extending them.
Patrick Zabawa can be reached at pzabawa@umich.edu.