ACRU

Robert Knight: How to Encourage Failure

This column originally appeared in The Washington Times on October 27, 2009.

If your company was in a financial fix, would you (a) try to attract top talent or (b) cut salaries so low that top talent wouldn’t return your calls?

The Obama administration’s dictate on Wednesday to seven major companies that received bailouts to slash top executives’ salaries by 90 percent, to the level of junior executives at small companies, smacks of several things, but most of all, envy. They’re playing to the nasty little impulse to which we’re all vulnerable and which is addressed in the Tenth Commandment: “Thou Shalt Not Covet.”

It’s not new territory for liberal politicians, whose mantra of forced economic “equality” is really covetousness in drag. But the singling out of the five top executives plus the next 20 highest-paid people in the companies for punishment smacks of the spectacle of royalty being led to the guillotine to the cheers of the crowd.

Before American taxpayers enjoy this spectacle too much, they might ask why, if they are part owners of these corporations, they would want to scare away the kind of brains that could pull the companies up and make them profitable again.

For years, America’s liberals have been mouthing the pieties of the American Revolution while trying to impose the awful collectivism spawned by the French Revolution. Having a government bureaucrat issue absurdly punitive cuts in executive pay is high theater for leftists. For taxpayers in hock to the Troubled Asset Relief Program (TARP), however, it might better be viewed as high treason.

The Obama administration’s “pay czar,” Kenneth Feinberg, is giving top-down orders to cap pay at no more than $200,000(later upped to $500,000). That might sound like a lot, but not if you’re managing tens of thousands of employees and hold the financial future of millions of stockholders in your hands. Unless the 25 targeted employees in each company are not officially made slaves, what would keep them from leaving for companies that will pay the going rate? Let me share a scenario dreamed up by a friend of mine:

“Ol’ Dwayne Simmons – president of the Cotton Farmers Bank and Loan Co. in Tinytown, Miss., – makes more than $200,000 a year. Suppose a delegation from Bank of America were to fly down to Tupelo, rent a car, drive county roads to Tinytown and offer Ol’ Dwayne the presidency of BOA? How would he respond?

“If he had any sense he’d say:

” ‘Gentlemen, I make close to $300,000 in salary and perks right here in Tinytown. I’ve got a great insurance package. The bank gives me a membership in Sweetwater Country Club. Betty Elizabeth, my daughter, is a cheerleader out at the high school. The payments on our four-bedroom, three-bath house run only $882 a month – and we’ve got a Jacuzzi in the backyard. Why should I take on 20 times the workload and move to a congested, crime-ridden city for a cut in pay? I’m beginning to see why you folks went bankrupt! Now if you’ll excuse me, I got work to do.’ ”

Before the bailouts, critics charged that overpaid executives were ripping off the company’s stockholders. Nobody is worth the $23 million that some CEOs are getting, they said. These salaries and perks were coming out of the dividends of widows, senior citizens living on dog food, and the terminally ill. But, why, if the executives are not worth the money, would companies compete to get them?

In 2005, a news release that ran in Hospital Impact – a niche publication for the hospital industry – featured Burke Whitman, who had just resigned as CEO of Triad Hospitals and moved to competitor Health Management Associates. So what happened to the stockholders as a consequence? Because of one man’s job switch, Triad’s stock lost more than 3 percent that day, or $120 million in market cap, whereas Health Management Associates’ stock gained 8 percent, or $460 million in market cap. (Market capitalization is the aggregate value of a company or stock.)

These two companies are to Bank of America and American International Group Inc. as green peas are to basketballs. So who is Mr. Obama or the pay czar to say that CEOs aren’t worth the millions they’re paid? Quite obviously, they can be worth hundreds of millions of dollars to stockholders. Mr. Whitman was worth $460 million to Health Management Associates’ owners.

After the bailout, Mr. Obama wagged his all-too-familiar professorial finger and said:

“This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success.” (Didn’t anyone hand him the Democratic talking points?) “And we believe that success should be rewarded. But what gets people upset – and rightfully so – are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers. For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste, it’s a bad strategy, and I will not tolerate it as president.”

The list of things the Obama crowd will not tolerate is growing. Health and Human Services Secretary Kathleen Sebelius will no longer tolerate dissent on the government health care takeover bill by insurance companies that seek to warn their clients. And just the other day, White House Communications Director Anita Dunn said she would no longer tolerate Fox News.

Because some of the biggest companies in the world now partly belong to American taxpayers, should they tolerate the pay czar ensuring that their investment can’t compete for the best talent?

Indeed, they can’t even hire Ol’ Dwayne because, thanks to the new fuhrer of American business, they can’t afford him.