February 9, 2009
Democrat Wage Controls Mean Mediocre Management
Over the ages of human existence, wage and price controls have ended the reign of Egyptian pharaohs, brought down the Babylonian Empire, and further weakened the Nixon administration. But that didn't stop Senator Claire McCaskill from proposing wage controls again. McCaskill (D-MO) introduced a bill that would make it illegal for any employee of a company bailed out with taxpayer money to get more compensation than the president gets.
Even though virtually all big company execs have vastly more experience than Obama, most would have been elated to get his generous total compensation package, had the bill passed. In her transparent attempt to stir up more class envy, Senator McCaskill must have overlooked the fact that the annual taxpayer cost of the president's compensation could feed about eight starving African nations.
The total pay package
Besides his $400,000 annual base salary, Obama gets a $100,000 nontaxable travel account, a $50,000 expense account, and $19,000 per year for entertainment. He also is given tax-free use of a 132-room mansion with a staff of cooks, waiters, servants, doctors, and a top-notch security force. The mansion, set on 18 acres, includes 35 bathrooms, a movie theater, bowling alley, billiard room, tennis court, jogging track, putting greens, and a home office. When that becomes too confining, the president and his family can fly on any of his fleet of helicopters to Camp David, a taxpayer-funded 125-acre retreat that also is fully staffed.
Speaking of private aircraft, the president can choose from two custom taxpayer-funded Boeing 747s, or smaller craft in case he needs to visit a location with a shorter runway. Perhaps someday he'll take one of them to Detroit to see how cars are made. Depending on where he fills up, it could cost taxpayers hundreds of thousands of dollars just to fuel it. (Must not be a hybrid.)
And like Tom Daschle, the President is provided with limousines and drivers. Former presidents also can rake in windfall profits for speeches, just as Daschle has been doing as a former senator. For instance, that helped Bill Clinton somehow manage to collect $109M in just eight years.
Manhattan and Wichita the same
But alas, President Obama supplanted McCaskill's generous proposed pay plan with a $500,000 cap on annual executive compensation. Obama's cap presumably would apply arbitrarily to executives working in Manhattan or Wichita, regardless of the company's size or the scarcity of skills needed to do the job.
Democrat Congressman Barney Frank went even further, audaciously suggesting that he and his fellow lawmakers should determine the executive pay for all US companies. Libertarians and conservatives are ridiculed as alarmists for warning that any wage controls become a slippery slope, but Congressman Frank already has proven them right. And since many liberal entertainment elites declare themselves to be a corporation in order to reduce their tax bills, will Barney slash Oprah's pay too?
In most companies, a subset of the board of directors serves on an executive compensation committee. To determine a fair package for their own execs, they review the pay packages of other executives that have comparable experience in their industry and geographical area. Since they can't always predict accurately the future performance of their executives, they sometimes overpay or underpay.
Large shareholders, such as mutual fund managers, typically are quite vocal in criticizing boards for their mistakes in setting compensation. Occasionally, a professional turnaround expert will add bite to the fund managers' barks by waging a proxy battle to take control of an unresponsive board and replace the firm's executives with better ones, thereby benefiting all shareholders and customers. That's what should have happened at Fannie Mae, had Barney Frank and Senator Chris Dodd (D-CT) not been negligent in overseeing its operation.
Business publications list comparisons of CEO compensation and their company's performance. For instance, here is the most recent Forbes comparison. Note that the average annual compensation of the top 25 CEOs ranged from $700K to $111M. Those historically have been America's best-performing CEOs -- the kind of executives we taxpayers, as new shareholders of the bailed out companies, want to hire. But President Obama apparently doesn't want the best, judging by his proposed $500K cap.
Sauce for the goose, sauce for the Apple?
Especially ironic is the suggestion by liberal journalist and Obama sycophant Thomas Friedman that Apple CEO Steve Jobs would be perfect for running a bailed out auto company. Mr. Jobs has been averaging the highest compensation of the top 25 CEOs: $111M per year.
Adding to the irony is the fact that über liberal Al Gore has been on the Apple board since 2003, and serves as one of three members on the company's compensation committee. Although Mr. Jobs has taken a nominal annual salary of $1 since he rejoined Apple in 1997, he has accumulated enormous paper profits by exercising stock options -- some illegally backdated, according to SEC charges. He also has the use of a $90M Gulfstream V jet. Would Friedman let him keep that if he were to join General Motors?
Even Gore himself was compensated $554,245 for attending a few meetings in fiscal 2008, according to Apple's most recent proxy statement. Meanwhile, his fellow Democrats, including the President of the United States, vilify more experienced executives that are compensated at that level for full-time work.
With more bailouts, American taxpayers involuntarily become shareholders in private companies. In a free economy, investors can sell their shares at any time, but in this case, taxpayers will be locked in.
Furthermore, in a free market, investors can rely on the laws of economics to bring down poorly run companies. If they notice that a board is overpaying its executives, smart investors can profit simply by shorting that company's shares or investing in one of its direct competitors.
In a free market, poorly run companies eventually run out of funding options: they can't find investors foolish enough to purchase their stock or bonds. That also strengthens their better-run competitors, which then can provide good jobs for refugees from the dying company. However, a poorly run nationalized company can return to Congress for endless funding, even when it's clear that the failing company should be financially euthanized. One inefficient, taxpayer-funded player can poison its entire industry by overpaying its suppliers or undercharging for its products.
As economist Walter Williams brilliantly points out, bailouts or any government spending on a stimulus package is equivalent to "taking buckets of water from the deep end of a swimming pool and dumping them into the shallow end in an attempt to make it deeper." Jim DeMint appears to be one of the few senators that understand economics, as he proposed a since-defeated bill that included no new spending.
Other Republican senators remain determined to commit political suicide (and economic homicide) as they propose Democrat-Lite bills that increase spending by "merely" 400 or 800 billion dollars. Deposed Babylonian rulers must be laughing at them from their graves.