Congress Bans Pay for Performance

Posted February 17th, 2009 at 3.22pm in Enterprise and Free Markets.

A small provision slipped into the stimulus (PDF) by Sen. Chris Dodd is making big waves in the banking and finance industries. The last-minute addition to the bill, which pretty much no one noticed until after the legislation passed both chambers, places sharp limits on bonuses available to top executives and other high-earners.

How sharp? How about this:

[Title VII, Section 7001] A prohibition on any compensation plan that would encourage manipulation of the reported earnings of such TARP recipient to enhance the compensation of any of its employees.

So no more tying pay to performance.

But don’t worry, Sen. Dodd perhaps foresaw that complaint and so included a special allowance for “long-term restricted stock” that does not vest until the government has been paid back.

Think about that for a minute, and the problem becomes as clear as day. Here’s how Lucien Bebchuk (of all people!) puts it:

In such circumstances, restricted stock may provide incentives for executives to take excessive risks with the bank’s survival. Consider the case where an infusion of additional capital would greatly dilute the value of common shares but would be best for the bank, while failing to get that capital would put the bank’s future at risk. In such circumstances, compensation in restricted common shares would provide executives with an incentive to avoid raising capital (which would wipe out their shares’ value) and gamble on survival without additional capital.

While one might expect that Bebchuk’s solution to this sort of problem would be to let the courts figure it out or maybe hold weekly shareholder votes, even he recognizes that these new pay caps will cause distortions and perverse incentives.

More clearly, they will cause banks to think twice about participating in TARP and related programs. While that’s not a bad thing, it’s clearly not what the Obama Administration was hoping for, either.

(For more on the unintended consequences of pay regulations, see my previous posts on golden parachutes (which the Dodd insert bans), pay caps, and bailing out of TARP.)

14 Comments

February 17, 2009 David West, Omaha writes:

Actually, it is far deeper than what you describe. Also included in those sections are a restriction on all CEO and upper management pay to a maximum of the salary of the President of the United States.

Bonuses in excess of $100,000 are not allowed, as per your restrictions mentioned.

Every TARP company has to create a Board of Compensation to evaluate all their employees salaries levels.

Oh, and shareholder votes to override any of this are non-binding as long as the company is under TARP.

These are all in there.

February 17, 2009 Ozzy6900, CT writes:

Take if from a disgruntle, Connecticut resident. I have been writing to Senator Dodd for years asking him to follow the Conservative way but of course, that will never happen. I also have asked Senator Dodd for his resignation because he failed in his duty over and over. Again, this will never happen because the imbeciles in Connecticut keep voting this looser in office! Senator Dodd is a perfect example of why I am seeking term limits for Senators and Congressmen.

February 18, 2009 Executive Compensation: 02-17-09 No Pay for Performance « Financial Economics Today - Wayne Marr writes:

[...] Congress Bans Pay for Performance from Heritage.org by Andrew M. Grossman [...]

February 18, 2009 Tim writes:

One would be tempted to withhold all taxs from the government for their poor performance. In return they would just print money as needed like they have been doing since the detruction of the gold standard. Printing money on their current scale causes inflation which in turn is an automatic tax on anything bought with money.
Maybe we could trade and barter them to death.

February 18, 2009 Congress Bans Pay for Performance « Stop Socialism Now writes:

[...] Congress Bans Pay for Performance [...]

February 18, 2009 Frank, Portland,OR writes:

Apparently, lessons of history are meaningless in this administration.. The siren call of the liberal mindset is fairness… The fairness they seek is only in benefit however. The fairness in productivity, is more along the lines of using ones ability. After all the employee who reports for work at precisely starting time, drops tools, stops production, and heads for his ride home at precisely 8hrs after showing up for work, does not deserve any less than the employee that shows 10 minutes early, and starts cleaning his tools when the shift ends instead of a half hour early.

Oh well, Who is John Galt?

Liberals must believe that productivity in business is simply going to happen and the Executive and Business Leaders involved are simply fortunate enough to be, “at the top.” Leadership has nothing to do with the prosperity of a Company. Business just happens, and the “decision makers,” are simply lucky and well connected enough to be given their jobs so that they can steal from the people that are working hard and too involved with battling evil greed to be able to make enough money to survive.

February 18, 2009 doug houston,tx. writes:

Ozzy in CT. is dead on with term limitations for all congressmen. Lifetime politicians are destroying this nation. After two terms in office, they have completely lost touch with the real world the rest of us live in. Like raising the FDIC insured limit to $250k as part of the “bank bail-out”. Who in the hell (other than politicians) has that kind of money in a savings account?

February 18, 2009 Hozro1, Oregon writes:

I would really like to see Chris Dodd and all the other members of Congress stop feathering their own beds! I would like them to receive Sosial Security, just like all the Americans that they represent!
I would like to see each and everyone of them earn the mean average income of the particular people they represent!
I would like to see their lifetime retirement go away, when they have only served one or two terms, when the rest of us are lucky to live to retirement with enough health to enjoy it.
I would like to see Congress get by with Medicare/Medicade benifits insteadof the Platinum medical insurance plans that they have now, and take with them when they retire.
I would like true representation in Congress, by people who have to live within and experience the means of all those that they represent!
Perhaps then they will not see a ‘Spotted Owl’, or a ‘Sucker Fish’, or millions of acres of forest, that maybe a dozen people each year will walk through, being set aside insead of utilized!
I would like to see Congress put our coal miners back to work, by funding ‘Charcoal’ production plants, insstead of $6.00 a gallon bio-deisel!
I would really like to have Congress lift its ban on ANWR and Teapot, and allow all that oil to be utilized, and fund the building of refineries!
I would like Congress to admit that the so called “Green House”, lie of Al Gore’s was aq lie, and to get over it.
I would like Congress to enact real legislation such as,”If you are here on a Visa, or illegaly and you make babies, you go to prison and then you are sent back home and you will never come back under threat of death.”
I would like Congress to just get back to the basics of making sure that we have a great standing and well funded Military. That our work force is not endangered, nor taken advantage of, and the same for business with giving tax credit for research and development, innovation.
Congress should recall NAFTA immediately! Americans have not once benifitted from this.
Congress needs to let die what is supposed to die. When you buy a house with nothing down, then keep drawing the equity out with each rise in value, its your fault and why should I pay for it?
If your broker talked you into buying Fannie mae and Freddie Mac and all those others, I didn’t, so why should I bail you out?
If your back went under, and you had more in there then could be covered by FDIC, why should I pay for it? You were the one to lazy to move it around to several banks to cover yourself and your family.
If you’re an illegal and you want baby formula and pampers and housing and food stamps and all that because your family is hungry? Not my problem, and I’ll explain why.
Immigrants when they come here, pay a fee to the government, about what an illegal pays a coyote, and signs documents stating that they will not accept any of America’s Social programs and/or the States too. They will pay all their taxes and if they have abusiness that means payroll, unemployment, social security, workman’s comensation, et al. They also sign a document that in an act of War, they will fight for this Nation, this Republic! Illegals to none of this! These are things Congress and the Presidency should be doing for our Republic! The question is, will they?
Hozro

February 18, 2009 Dottie Collins--Greenville, MS writes:

Dodd is a crook; he received VP treatment when getting his mortgage! How dare he to put such a thing in a bill. He must be defeated come election time!!

February 18, 2009 Mike, Hickory, North Carolina writes:

In other words: “Oh what a web (the Socialist Left does) weave, when (through such Socialism they) practice to deceive (and control)!”

February 18, 2009 duelles, Santa Fe, NM writes:

Ozzy6900, I feel your pain. after 32 years I picked up and left CT. Dodd is one of the reaasons, The voting public that kept hom in office is a reason as well.
Some years ago when Dodd reported hs finances during an election bid, I realised that this man was not equal to the task of the banking committee. His finances were a mess. Strangely, he is doing rather well now. I wonder why? Is it because he is a frigging crook? Possibly.
I hate term limits, but I despise the entrenched power mongers even more.
One reluctant vote for throwing them out of office.

February 18, 2009 Dale Daubenmeyer - Troy,MI writes:

Our current administartion and liberal media scoff at the idea of the conservative saying; we are headed in a socialist/communist direction I have coined the statement below “are we there yet”, please read below and judge for yourself.

10 Planks of the Communist Manifesto outlines a set of short-term demands. These included, among others, the abolition of both private land ownership and of the right to inheritance, a progressive income tax, universal education & healthcare, centralization of the means of communication and transport under state management, and the expansion of the means of production owned by the state. The implementation of these policies, would, the authors believed, be a precursor to the stateless and classless society.

One particularly passage deals with this transitional period:

When, in the course of development, class distinctions have disappeared, and all production has been concentrated in the hands of a vast association of the whole nation, the public power will lose its political character. Political power, properly so called, is merely the organized power of one class for oppressing another. If the proletariat during its contest with the bourgeoisie is compelled, by the force of circumstances, to organize itself as a class, if, by means of a revolution, it makes itself the ruling class, and, as such, sweeps away by force the old conditions of production, then it will, along with these conditions, have swept away the conditions for the existence of class antagonisms and of classes generally, and will thereby have abolished its own supremacy as a class.

10 Planks of the Communist Manifesto
1.)Abolition of property in land and application of all rents of land to public purposes.
2.)A heavy progressive or graduated income tax.
3.)Abolition of all right of inheritance.
4.)Confiscation of the property of all emigrants and rebels.
5.)Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
6.)Centralization of the means of communication and transport in the hands of the State.
7.(Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.
8.)Equal liability of all to labor. Establishment of industrial armies, especially for agriculture.
9.)Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equal distribution of the population over the country.
10.)Free education for all children in public schools.Abolition of children’s factory labor in its present form. Combination of education with industrial production, &c., &c.
The current administration would like us to believe they are doing this in the best interest of the people, I believe they are wolves in sheep’s clothing. Write your Senator and ask him to go line item by line item and eliminate anything that doesn’t stimulate the economy “that’s jobs, not work” in the next 0-24 months. The current plan has only 15% going towards a stimulus infastructure that means $ 747 billion is pork. See attached reading from heritage foundation.

February 19, 2009 Marshall Hill-Michigan writes:

My grandparents left Western Europe before WWI,
and they could see the Country changing and left
just before the Armenian Genocide began again!The
moral is how long will we wait to act on these
moves being made by Elected Officials that we are
paying to abuse us!

February 20, 2009 Tammie M writes:

We have (had) a system in this nation that everyone else in the world would like to have. Freedom…. I strongly agree that the government has no business in our business….. This bailout-stimulus whatever they call it is a set up and America including the very politicians that put into being will live to regret. You can’t pet a snake…. it turns around and bites you.

The Heritage Foundation - Leadership for America

The Foundry