Politicians held their collective nose to vote in favor of a massive boondoggle that solves nothing, but at least they were able to limit executive pay. Along with handing out three quarters of a trillion dollars, the bailout bill imposed limits on CEOs whose companies end up benefiting from the Treasury's largesse.
Unfortunately, like many of the rewards the economy will supposedly reap, the limitations on executive pay are largely illusory. Oh, there are plenty of reasons that pay should be capped -- 700 billion of them, in fact. It's just there aren't any teeth in the package.
All bark, no bite
Maybe that's why Hank Paulson finally gave in to demands that the bill include language to limit pay. It's either so vaguely written that it'll have little practical effect, or so specific that the situations where it can be used won't really matter. For example, allowing the government to claw back pay from CEOs first requires a finding of fraud. Yet that's probably only going to be a very small portion of any recovery, and besides, corporations can already get back compensation if such activities are uncovered.
Daniel Mudd of Fannie Mae
Bans on so-called golden parachutes are only prohibited if employment agreements are written during the rescue period, and if the company sells more than $300 million in assets to the government. Although some analysts think the Treasury will still be able to impose restrictions if the government takes ownership of a lower amount, if the severance language already exists or a golden parachute is already in place then the new law will not help.
Just before JPMorgan Chase
According to at least one analyst, the top executives at Goldman Sachs
We've been paying CEOs for failure for so long that it's second nature now. Regions Financial
If you play with fire...
But this isn't a diatribe against CEO pay. In our capitalist system, you're free to earn what you can, and what the market will bear. The government shouldn't be setting what corporate executives earn.
...expect to get burned
No, this is for those executives who are taking the government's money. If they're turning to the taxpayers to get bailed out, then as part-owners of their business, we have a right to say what they'll be paid.
The board of directors should have taken this role, but instead they've abdicated it, allowing CEO compensation to spiral out of control. Unfortunately, we investors haven't done our part, either. We were all too willing to hop aboard the gravy train with biscuit wheels, so long as we were sharing in the growth.
Law of unintended consequences
Yet we must tread carefully here, too. The last time the government tried to cap CEO compensation, we got the explosion of stock options. Like squeezing a balloon, when you press down here, something else pops up over there.
There is hope, however, that as ineffectual as these limits may be, they may form the basis for directors to rein in the excesses on their own. If only because companies don't want the government to meddle in their business, the law may cause reforms to take hold.
JPMorgan Chase is a Motley Fool Income Investor selection. American Express is a Motley Fool Inside Value pick. The Fool owns shares of American Express. Try any of our Foolish newsletters today, free for 30 days.