Wage Controls on the Way?

The WSJ editorial page is decrying “The New Wage Controls” today:

The U.S. “market” economy took another hard-to-believe turn this week with the Obama Treasury appointing a “compensation czar” to dictate wage controls on private companies that take taxpayer money and offer guidelines for every other U.S. publicly traded company.” Can wage and price controls for everyone be far behind?

This is disingenuous hyperbole, for a few reasons. First, claiming that executive compensation in the ante-Obama era resembled a “market” driven system is plain wrong. Rather, it was (and still is) driven by federal rules and regulations, and fraught with agency risk and distorted incentives (much like the mortgage market, in fact). And while there is longstanding debate over whether executive compensation and corporate performance are well correlated, we know at the very least that the relationship is not a statistically powerful one, and that there have been notable instances of huge gaps between the compensation lavished on some public companies’ executives and the long term value those executives provided for their firms’ shareholders. All in all, it’s not hard to make the case that it’s a somewhat dysfunctional system, and a recent NY Times article summed it up well:

For some time now, “should” has been the operative word for investors and corporate governance groups pressing for closer links among executive pay, performance and shareholder value.

Second, the “compensation czar” is only going to oversee management compensation at the companies that are relying on direct public support. Essentially (or ostensibly), we the people, via the federal government, have become creditors and/or shareholders of certain companies, and as such, are exercising some control over how our assets are used. This simply means is that there’s finally a stakeholder at the table other than executive management and directors with some power. In a better functioning system, company directors and executives would already behave as their own ‘compensation czars’, rather than steadily enriching themselves at shareholders’ expense (a small percentage of companies have boards and management that do behave this way; perhaps not surprisingly, few if any are on public life support at the moment). In the case at hand, it sounds as though the federal government and its comp czar are simply going to act as any responsible business owner would.

There’s a bitter irony in all of this though, as the executive self-enrichment of recent decades was enabled to a significant extent by public policies and regulations at the federal level, including: ownership discloure rules that have made it easier for bloated managements and boards to defend entrenched positions; caps on the tax deductibility of executive compensation that have led to over reliance on generous short term option grants and a short term focus on stock performance; and minimal disclosure of executive perqs (though the SEC improved that last one slightly in recent years). And that’s just a small sampling. We can only hope, when this episode is over, that the men and women in Congress don’t forget what it feels like to be an equity holder. Unfortunately, we suspect that those expensive plates at future campaign events will come with more than a healthy dollop of amnesia. Thus,  if the office of the comp czar were truly put to good use, it would seek to dismantle and redesign the regulations and tax rules that continue to work against the interests of ‘regular’ shareholders.

URLs:

http://online.wsj.com/article/SB124476565985708427.html

http://www.nytimes.com/2009/04/05/business/05comp.html

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1014281