Thursday, October 22, 2009

How to Control Executive Compensation

To return to a previous sore point:

I'm sorry to say that I think Mr Obama's "Pay Czar" is making a hash of a response to the controversy over executive compensation. He has come up with a complicated scheme that will reduce pay for a few overpaid and probably undeserving executives (after all, they were the ones who caused the whole economic meltdown, they and their ilk). The scheme will end up in court, and after a long and costly series of trials and appeals, it'll be voided by the Supremes. It will cost us all a lot of wasted time and money, and accomplish nothing.

The problem -- the real problem -- is not that a couple of hundred honchos in bailed-out companies have exorbitant pay packages. The real problem is that large-company executives in general have exorbitant pay packages, while the rank and file people are stagnating economically, causing the gap between the rich and the rest of us to grow wider and wider, which in turn undermines the working and middle classes, who are the guarantors of the success of our democratic system of government.

The stress point in the popular media appears to be that our constitutional system of limited government prevents the government from regulating executive compensation.

Oh, pooh. Congress is perfectly capable of regulating executive compensation, and of doing it in a way that's in keeping with our present concept of "limited" government.  And it can do it in a way that is manifestly fair, in that it treats everyone the same, regardless of how much bail-out money their companies get.

Executive compensation is deductible as a business expense; there are some minor and essentially meaningless limitations on that, but basically every dollar the company pays out to every employee, executive or otherwise, is a dollar it doesn't get taxed on.

So all the Congress has to do is limit the tax deduction for compensation. I'm pretty sure Congress doesn't want to discourage companies from paying all those millions of middle- and upper-middle-class managers and union workers who are the foundation of their constituencies; nor would I. But it's a simple matter to take a self-adjusting figure, like the poverty line or the national median income or the national average income, and change the tax law so that any compensation to any individual (in whatever form) that exceeds a stated percentage of the chosen self-adjusting figure -- in my mind, 250% of the national median income seems about right -- would not be deductible from the company's taxable income.

So AIG and Goldman, Sachs are still perfectly free to pay their worthless executives exorbitant figures for ruining the entire economy of the country; they just don't get the rest of us to pay for part of it, in the form of lower corporate taxes.

It's really that simple.