Make no mistake. The appointment of a federal official reportable only to the President to oversee the pay of corporate executives is an un-alloyed power grab. Congress and the President have been unable to restrain their zeal in creating financial and process controls on companies who have received funding under the TARP program. That the Pay Czar will endure long after the last TARP dollar is repaid is a virtual certainty.
There is an “agency” issue disguised in here which is worthy of consideration. Agency problems occur when incentives are created (
in this case by the President and Congress) which create a difference between that which is best for the shareholder and that which is best for the corporate officer. In this case, it is the harsh terms of the President, Congress and the Pay Czar which are colluding to create the mother-of-all agency problems.
Imagine the situation: You are the CEO (
or other highly compensated employee) of a major bank and your pay and benefits are severely limited until such time as the bank pays back the TARP money plus interest to the Treasury. Now being a prudent businessman, you are confronted with the dilemma: do what is right for the company or do what is right for the CEO. There is no doubt that having a couple hundred million dollars of government funds on the balance sheet is comforting to shareholders and customers alike and that paying back those dollars will create some (howeve
r minor and transient) concerns with the aforementioned groups. Maintaining those TARP funds may be fiscally prudent. However, maintaining those funds will also mean that highly compensated employees will suddenly become formerly highly compensated employees.
Highly compensated employees are treated that way for one and only one reason: they bring profits to the bank. In an environment where some banks are limited in their ability to pay and others are not, those with the limitations will contribute to the loss of the very individuals they need the most to earn their way out of trouble. Highly compensated employees (read that as highly profitable employees) will follow market forces as the inexorable hand of capital rewards those who produce and punishes those that do not. The most skilled, the most profitable employees will depart.
You need only look at the punitive measures levied on the banking industry as a set of negative incentives. While the President and Congress seem to be trying to punish the recent excesses of the banking community they are actually creating a set of incentives which will move the banks which received TARP funding to prematurely pay back their government funding to the Treasury.
I suspect that we’ll shortly see a former-TARP bank in dire financial straits due to their response to the Presidential and Congressional dis-incentives.
Bottom line: The President and Congress appear are making the most of this crisis. Mr. Chavez’s comments about being to the Left of the President were prescient.