No Limits on Executive Compensation

The Obama administration announced yesterday that it

will order the firms that received the most aid to slash compensation to their highest-paid employees ... .

The plan, for the 25 top earners at seven companies that received exceptional help, will on average cut total compensation this year by about 50 percent.

This plan, as emotionally appealing as it might appear, is miguided.

Excutive compensation did not cause the financial crisis, nor will limits prevent the next one.

The limits will not work, since the affected employees will either quit and work elsewhere, or find creative ways to maintain the same level of compensation (e.g., "retire," get hired as a consultant, and charge exorbitant fees), or relocate to overseas branches where they can circumvent the limits.

And government control of compensation is a horrendous precedent that will open the doors to even more destructive meddling in the financial sector.

My earlier thoughts on this issue are here. Bottom line:

The lesson to be learned ... is that this kind of dilemma is one reason governments should not provide bailouts in the first place. Once a bailout occurs, the government is inevitably drawn into the day-to-day business decisions of the companies and forced to resolve issues with no good resolution.