Bailed-out companies to receive pay cut orders
Here is a formula for you. Take greed and bad business practices in equal parts and mix it with
companies who were deemed “to big to fail”. Once stirred together, combine the resulting mix with $700 billion in bailout money. After baking for several months, what do we get? Let’s see now, we have seven companies who have received the most bailout dollars. Those would be Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial. These companies are still awarding their top executives large amounts of money for a job well done, which you would think they have the right to do. There are reports however, that the Treasury Department will announce pay cuts for those executives within days. From The Associated Press:
The Treasury Department is expected in the next few days to order companies that received huge government bailouts last year to slash the base salaries of their top executives by an average of 90 percent and cut their total compensation in half, according to a person familiar with the matter.
The cuts apply to the 25 highest paid executives at the seven companies that received the most assistance, the person said Wednesday, speaking on condition of anonymity because the decision has not been announced.
Kenneth Feinberg, the special master at Treasury appointed to handle compensation issues as part of the government’s $700 billion financial bailout package, is making the pay decisions.
Wait just a minute here! Where does the Treasury Department get off, thinking they can tell these companies how much they can pay their executives? Right or wrong, they have $700 billion reasons why they think that. As would be expected, the leadership at these companies is raising their voice in protest, saying they need to be able to compensate these executives, in order to retain the talent they need to continue their turnarounds.
I have talked to several people about this, back when the first pay cuts were announced and the going opinion seems to be that these companies received taxpayer dollars from the federal government and therefore should be subject to scrutiny and oversight by that same federal government. These are ordinary people, like you and me, who go to work every day and pay their taxes. While I can see their point and might even agree somewhat, I still have a problem with the results.
To begin with, these companies should never have been bailed out in the first place. Sorry if that doesn’t make sense to some people, but the federal government is not in place to bail out every company that makes bad business decisions. As it was, the companies who were deemed “to big to fail” seemed to have been cherry picked. Some were allowed to fail (Lehman Brothers) and others were infused with billions of our dollars to keep them afloat. So, we come back to the recipe I mentioned in the first paragraph.
Greed, bad business decisions, gigantic companies, and a meddlesome federal government who seemed to think they had to step in. George W. Bush started it and President Obama continued the practice of bailing these companies out. The result is a group of companies who can not construct their own compensation schedules because the federal government thinks it has the right to tell them who gets paid how much. Do they have the right to do that, given the amount of money they have spread around? Some would think so, but even if they have that right, they are in territory where they do not belong.
Simply put, it is not the business of the bureaucracy in Washington, D.C. to interfere in such affairs. They shouldn’t have done it a year ago and they shouldn’t have done it earlier this year, after President Obama took the oath of office. Even though these companies may have a good point when they protest these pay cuts, they did make their own bed. The most troubling part for me is the precedent that has been set. I am afraid it will be very hard to break, if something like this happens again.
Good post Larry and right on the money. The people who created the problems at most of these companies, and certainly those at AIG, are long gone. Those who remain are needed to clean up the mess left behind; but they will be quickly out the door and scooped up by competitors who are under no such compensation constraints. That’s not conjecture — that’s a fact. The issue the government can and should be wrestling with is not what the compensation should be but whether banks should be active in trading the speculative products that got them into trouble, how much capital should be set aside against the risks being taken, how these groups should be regulated, and even whether the seperation of banks (lending institutions) and investments banks (trading and underwriting institutions) should be reintroduced.
Good post, Larry. It’s a mess. I did find it interesting to read the comments of Bak of America’s CEO Kenneth Lewis after he “decided”to return/forego his compensation for last year:
…Lewis “felt it was not in the best interest of Bank of America or him to get into a dispute with the pay master.”
Sort of chilling, but that’s the rub. These companies did invite govenment scrutiny by accepting government money. Maybe it will be instructive, down the line, for other corporations who seek the quick out from taxpayers-the only reason I sort of like the Feds messing with compensation packages. It’s a fair point to ask how the companies can attract “turn around” talent if this continues, but someone like Lewis-who presided over B of A’s downslide- doesn’t qualify. And really, what does he care if he gives up a million or so this year? He retires soon, and a 69 million dollar pension package that includes salary, benefits and almost 14 million dollars in stock options awaits.
The government is now part owner of these companies so if the government decides to screw them up even more thats their right. So I say sock it to them. But wait aren’t we the government so if this causes the companies to fail again they we will have to again bail them out. Truth is I don’t have the answer, but I doubt the idiots in Washington do either.
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These companies should never have been bailed out in the first place. I was one of those people who felt that if they jumped in bed with the government they deserved what they got, but I do worry that Obama will not stop with the bailed out companies. I am afraid this sets a bad precedent.
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