Surprise good news in the TARP bill that President Obama just signed. I could get used to this.
A provision buried deep inside the $787 billion economic stimulus bill would impose restrictions on executive bonuses at financial institutions that are much tougher than those proposed 10 days ago by the Treasury Department.
The provision, inserted by Senate Democrats over the objections of the Obama administration, is aimed at companies that have received financial bailout funds. It would prohibit cash bonuses and almost all other incentive compensation for the five most senior officers and the 20 highest-paid executives at large companies that receive money under the Treasury’s Troubled Asset Relief Program, or TARP.
Speaking as a trained biologist, that is to say with about the econ training of a table lamp, awarding performance bonuses to the executives of companies that need rescue by the TARP fund seems to invalidate the idea that bonuses are based on performance at all. If compensation scaled with results in any meaningful way then what most executives deserve right now is a beating. Last month has proved if anything that “bonuses” are just another type of unaccounted compensation that executives will pay themselves if they have to raid the bank’s last stack of C-notes to do it.
If we learned anything from the last year, it is that paying top executives lavish salaries with guaranteed bonuses and ridiculous perks DOES NOT WORK. A casual glance at recent history shows that as superstar executive salaries increased over time their decisions got progressively stupider. So arguments like this from Obama’s advisors strike me mostly as knee-jerk conservatism, in the Buckleyan sense of standing athwart change and shouting ‘stop.’
“These rules will not work,” James F. Reda, an independent compensation consultant, said on Friday. “Any smart executive will (a) pay back TARP money ASAP or (b) get another job.”
If you think about it, neither of the advisor’s worst case scenarios even sounds particularly bad. Regarding (b), it makes sense that Navy captains who run a ship aground never command again. The middle ranks have enough qualified candidates that the Navy doesn’t need to trust a guy who already left one ocean vessel with its keel exposed.
Advisor concern (a) strikes me as just as baffling. He apparently worries that low pay will drive executives to either not ask for TARP funds that their firms don’t need, or they will pay back the loans in a rush. Is there any particular reason why this guy is worrying about these things, rather than hoping for them? The TARP program looks like last-ditch life support to us; to bankers it looks like a giant free-money trough. Anything that incentivizes firms to only come for help that they need, you know, the way we meant for the funds to be used, seems like a rather good idea. The government wastes money and there are more rescue funds for firms that really need it. The other scary possibility is that firms will feel obliged to pay back the funds faster. Uh, great?
The only way to make sense out of the unnamed advisors’ concerns is to think that executives will perversely starve their banks of TARP funds to the point that the banks die and, falling into a smoking hole in the ground, dragging down the rest of the baking sector with a gravity well of leverage. If major banks were run like Zimbabwe maybe, but largish corporations have shareholders and a board. It could be naive idealism speaking, but I like to think that a CEO who condemned his firm for such obviously selfish reasons would be chased out of the building with sticks and torches.
We will see if I am wrong, obviously. Maybe a bunch of pissed off CEOs will destroy their own companies because the government took away their third house in the Hamptons. Somehow I doubt it.