Corporate Governance

Permitting Excessive Compensation

By J. Robert Brown

So the House passed another bill designed to limit executive compensation in those companies that receive public funds.  Rather than cap salary, the Bill (HR 1664) took a different tact.  It prohibited excessive or unreasonable compensation (to be defined by Treasury).  As the Bill states:

• (1) PROHIBITION.—No financial institution that has received or receives a capital investment under this title, or with respect to the Federal National Mortgage Association, the Federal Home Loan Montage Corporation, or a Federal home loan bank, under the amendments made by section 1117 of the Housing and Economic Recovery Act of 2008, may, while that capital investment remains outstanding, make a compensation payment to any executive or employee under any pre-existing compensation arrangement, or enter into a new compensation payment arrangement, if such compensation payment or compensation payment arrangement—‘‘(A) provides for compensation that is unreasonable or excessive, as defined in standards established by the Secretary in accordance with paragraph (2); or (B) includes any bonus, retention payment, or other supplemental payment that is not directly based on performance-based measures set forth in standards established by the Secretary in accordance with paragraph (2).

Certainly prohibiting compensation that is "excessive" represents a reasonable enough approach.  But the idea that excessive compensation is only prohibited for companies that receive public monies is not defensible.  The law would allow companies, once they pay off the bailout funds, to go back to paying excessive compensation.

If excessive compensation is to be banned, shouldn't it be banned for all companies, whether or not they recieve public funds?

Full post as published by The Race to the Bottom on April 06, 2009 (boomark / email).