Congress' hypocrisy on executive pay

Congress has taken some draconian steps to clamp down on excessive and undeserved pay at companies receiving bailout money.

CNN reports that "the Pay for Performance Act of 2009, which passed by a vote of 247-171, would empower Treasury Secretary Timothy Geithner to define what constitutes reasonable compensation, as well as to ban bonuses not based on performance standards. Geithner's guidelines would apply to companies receiving assistance from the government's Troubled Asset Relief Program, or TARP."

It is all together fitting and proper that they should do this. As a major shareholder in some of America's largest financial institutions, the United States government has every right and responsibility to ensure that corporate governance practices are fair and well-aligned.

"We own this company, in effect," said Representative Barney Frank, referring to the government's 80 percent stake in AIG. "As the owners of the company, we do not think we should be paying bonuses or should have paid bonuses to people who made mistakes, who were incompetent."

So why is it hypocritical? Because the United States government has allowed public companies to put up all kinds of red tape that prevents non-government shareholders of public companies from providing effective oversight of their investments. Frank's rationale for why we should impose pay caps at AIG is 100 percent right, but that logic doesn't extend to ordinary shareholders.

Carl Icahn writes that "under American corporate law share ownership does not count for much. Mr. Frank might be surprised to learn that a lawsuit would have almost no chance of success in court, even for a majority shareholder like the government. A.I.G. would most likely argue that the oft-cited 'business judgment' rule gives management wide latitude to set compensation without shareholder interference."

Instead of one-off laws limiting executive pay at companies where the United States government is a major shareholder, Congress should be looking at ways to allow shareholders to prevent executive pay gone wild at all companies.

Read Full Story

Sign up for Breaking News by AOL to get the latest breaking news alerts and updates delivered straight to your inbox.

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.