How Washington can fix executive pay

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As The New York Timesreports, "The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said."

There are really two separate issues here. The most immediate one is the issue of taxpayer-subsidized companies whether government, as the shareholder that saved the company from bankruptcy, has every right and responsibility to demand that pay be reasonable. But for other companies -- those which weren't saved by Uncle Sam -- there's really no compelling reason for the government to start dictating how executives should be paid. But at the same time, the events of the past year (and long before that too) demonstrate that there is a serious disconnect between the way companies pay their CEOs and the way they should pay their CEOs if the goal is maximum shareholder value.

There is a solution, however, that is far less draconian than arbitrary pay caps or changes in the tax code -- and it actually works by strengthening the free market instead of weakening it.

Here's what President Obama should do: Call in Carl Icahn and a handful of other activist investors who have built their fortunes by pushing around directors at poorly run companies, and ask them what changes in the law would make their jobs easier. Right now shareholders who want to shake up things at their companies face tremendous bureaucracy and corporate structures designed to entrench under-performing insiders.

By simply streamlining the procedures for launching proxy fights and dumping bad executives on the streets, and giving shareholders a greater voice in CEO pay, the administration could improve corporate governance in America tremendously without trampling on the notion of free markets.
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