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A Great Way to Stifle Talent and Entrepreneurial Spirit

There is a variant on the Golden Rule that goes like this: He who has the gold, makes the rules. That seems to be the position of President Obama and his congressional allies. They are preparing legislation, part of their plans to spend the remainder of the $700 billion TARP monies, to cap executive compensation for companies that have taken taxpayer money. That one is hard to argue with since these companies now have a duty not only to their shareholders, but also to the people of the United States. On the other hand, there are other provisions aimed at companies that have not accepted bailout money. To quote Hamlet, “Aye, there is the rub.”

Take the Money, Accept the Rules

Imagine you give a nice, crisp $50 to a homeless man, thinking that by giving him so large a sum of money you are helping him to get back on his feet. Then, as you watch, your homeless man as he picks up a streetwalker and then, with her, climbs into a luxury car and drives away. How would you feel? Surprised? Taken? Outraged? Well, since TARP became more than a big cloth used to cover things, the American people have been watching in mounting disgust and outrage as Wall Street, Detroit and others have begged for money, only to turn around and use it, to put it mildly, inappropriately.

Of course, the companies don’t see it as inappropriate. Industry insiders don’t see it that way either. They see these things as part of doing business. They are rewards for good work, they help keep talented people from going across the street. Seems altogether reasonable, but in truth these and other excuses like them mean nothing. What counts, when taxpayer money is involved, is the public’s perception of the company’s actions. When that perception is negative, there is great political pressure to force a change in the company. The Wells Fargo Las Vegas junkets are only the latest. The company, which took $25 billion in taxpayer money, cancelled the trips because of the public’s outrage and the implicit threat of federal intervention.

That outrage stems from the fact that when you come to Washington to beg for money, you should not turn around and live the same fast and loose lifestyle that sent you to Capital Hill, hat in hand, in the first place. No, you are expected to act responsibly, with thrift and industry with reasonable compensation and reasonable perks, something our bailout recipients seem to be failing at.

This being the case, there is little wonder that Congress and the Obama Administration are seeking to write some rules regarding corporate compensation. "If the taxpayers are helping you, then you've got certain responsibilities to not be living high on the hog," said President Obama. On the Republican side, the outrage is even worse. Consider the words of Alabama Republican, Senator Richard Shelby:

In ordinary situations where the taxpayers' money is not involved, we shouldn't set executive pay, but where you've got federal money involved, taxpayers' money involved, TARP money involved, and the way they have spent it, with no accountability, is getting close to being criminal.

Of course, close to being criminal is not the same thing as being a criminal. You expect him now to jump up and declare that “there ought to be a law!” That law is coming and it will cap CEOs to $500,000 a year, a bit more than the salary of the President of the United States, address the issues surrounding perks and bonuses and, in general, regulate a level of austerity among those who are taking bailout money.

As I said, given the use of taxpayer funds, that approach is hard to argue with. The money is Washington’s ticket to meddle in the corporate governance of these companies in the same way that accepting federal highway funds gave Washington the right to set a national speed limit back in the 70s.

What about companies that do not accept federal money? What about their compensation packages? The pending legislation has a few things to say about those companies, too.

Refuse the Money, Accept These Rules

According to a White House official, the proposals for companies that do not take TARP money would include requirements that:

·        Top executives at financial institutions hold stock for several years before they are permitted to cash out.

·        Nonbinding "say on pay" resolutions be adopted to give shareholders more say on executive compensation.

·        A Treasury-sponsored conference be convened to address the issue of a long-term overhaul of executive compensation.

None of these, in and of themselves, is necessarily a bad idea. The issue that should concern every business owner is the fact that these are rules for companies that have not taken any taxpayer money. These rules are intended for healthy companies, not troubled ones. Why? Senator Claire McCaskill (D-Mo) summed it up best when she said, “I do know this: We can't just say, 'Please, please.’”

Why do we need these ideas codified into law? What public good would they serve? They intrude into every corporation, there is no limit as to the size of the corporations so small businesses are affected right along with big businesses. If these become law, then what’s going to be next? No doubt something innocuous, another small, incremental step into what has always been a private concern between a company and its personnel. Take what is in this bill to its logical conclusion and you will see these private concerns become public and you will have to ask yourself how soon before there is a maximum wage to go along with the minimum wage.

The Bottom Line

When there is a ceiling on compensation, the truly talented tend to go where there is no such ceiling. There is little incentive to stick around when there are other places where the sky is the limit. Perhaps that enters into the reasoning, but it is hardly the point.

This is not about fairness, nor is it about corporate responsibility as the President would have us believe. Like the rest of the bailout, it is really about power and control in the private sector. Once government intrusion is accepted, it only grows, becoming more onerous and more intrusive. That will happen here, too. Slowly, inexorably, the federal government will intrude more and more into corporate governance and the only beneficiary of that will be the federal government. As for business, it will stifle the entrepreneurial spirit since it will ultimately limit the reward one gets for their hard work and it will do so at a time when we need all the entrepreneurs we can get.

What is before us now is the nose of the camel. If we don’t stop it now, pretty soon the whole camel will be in the tent and then it will be too late.