Government bought control of businesses

He who pays the piper calls the tune. This should be a lesson to companies tempted to get in bed with the government or to plead for taxpayer bailouts because they are “too big to fail” after they have experienced a run of bad luck or bad management.

President Barack Obama’s “pay czar,” Kenneth R. Feinberg, plans for the 25 top-paid executives at seven firms that receive extraordinary financial help from the government during the late, unlamented financial meltdown, to receive significantly less in salary and bonuses than they might otherwise have gotten. Total compensation for these employees will be cut by about 50 percent, with the cash portion of top executives’ compensation cut by 90 percent.

The companies involved are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the financing arms of the two auto companies. These firms received a total of about $250 billion from taxpayers.

Payments in the form of stock and stock options, as well as perquisites like country club memberships or private jets whose value exceeds $25,000 will also be curtailed. Executives who receive compensation in the form of company stock would have to wait two years before cashing in the first third of the stock received, with the other two-thirds redeemable in years three and four. The idea is to align executive pay with the longer-term performance of the company.

Although there is no doubt some sentiment within the administration, and perhaps among the public at large, for limiting what many view as excessive executive pay at large corporations (especially when executive decisions have led a company into trouble), these caps will be applied only to companies that received substantial bailouts from the taxpayers through the federal government. Even firms like Goldman Sachs, JPMorgan Chase and Morgan Stanley, which received billions in loans and loan guarantees but have since paid them back, will not be affected.

As tempting as it might be to applaud these essentially arbitrary decisions by Feinberg, they are potentially troublesome. They represent a government desire to more closely micromanage American corporations.

While it showed restraint in confining the pay limits to companies that have received huge bailouts, it clearly seeks to affect executive compensation at other firms by, for example, requiring that shareholders have a nonbinding vote on top executive pay.

We haven’t noticed proposals to limit the pay of top executives at the Federal Reserve, whose loose-money policies were probably more responsible than the decisions of top executives at any private company for the financial meltdown.

We haven’t noticed administration calls for “givebacks” from top executives at government-sponsored outfits like Fannie Mae (where CEO Franklin Raines’ total compensation from 1998 through 2004 was $91.1 million) or Freddie Mac, or from members of Congress or the executive branch who pressed financial institutions, through policy and bully pulpit, into expanding home ownership by giving mortgages to people whose qualifications were dubious.

With money aplenty and Fannie and Freddie mitigating the lending risk, too many financial institutions abandoned any semblance of lending standards.

While we privately believe that pay for top executives at some corporations has become somewhat ridiculous by good Peter Drucker management standards, in a market economy those decisions should be left up to the companies themselves.

If companies can pay top honchos multimillion-dollar salaries and stay profitable, fine. If they can‘t sustain themselves they should go out of business or reorganize under bankruptcy law.

The best bet would be for the government never again to bail out private companies with tax money. Perhaps the knowledge that with government money comes government control will deter at least some companies from taking a begging bowl to Washington.