US Government Approved Paychecks

President Obama's so called "Pay Czar" unveiled new compensation rules for firms that received large sums of government bailout money. The rules reduce total compensation by 50% on average and in some cases salaries have been cut by up to 90%! The current administration seems intent on invading every aspect of private and corporate life. The goal they cite is to ensure that companies align pay with proper incentives and enable firms to repay the money faster.

A close look reveals several flaws with this plan. First, aligning compensation with proper incentives is a very difficult task and it is not likely to work with cookie cutter policies such as those proposed by the "Pay Czar." Second, one of the changes made by these compensation rules was to make stock awards very long-term. The issue with long-term stock options is that over a long period of time many factors can affect a stock's price that are not in the control of the executives of the company. This means that long-term awards are likely to have little to no incentive effect as there value is likely to be viewed by the employee as beyond his/her control. Third, by limiting the compensation allowed to be paid in some of the most competitive jobs in America the government has put firms that borrowed money at a significant disadvantage when it comes to retaining and finding talent. This is likely to make it more difficult instead of easier for these firms to repay the government.

This is just another example of poor policy making and short-sightedness by our current administration.