Tuesday, April 28, 2009

CEO Salary Cap

Senator Claire McCaskill of Tennessee has proposed that CEO's of firms that have received bailout money from TARP have their salary capped at $400,000 per year, which is the same salary as the President of the United States.

Most economists are typically against capping prices or salaries, and as a sports economist I am not in favor of capping sports players salaries. But there is a different twist here, and that is the CEO salary cap is only on those firms that have received the "bailout" or a subsidy from the government. This is an interesting twist - since most of the firms (but not all) asked for the bailout money - and the government has an interest to make sure this taxpayer money is being used wisely - then this is really not an interference in an unfettered market. The government has already intervened and thus the additional intervention (CEO salary cap) is just a cost of accepting the subsidy.

While I am not a fan of "here's the money" and then at a later time, "here's the restrictions on your freedom", the CEO's could elect to give the money back to the government - especially those that were required to take the money even if they did not want it, or the CEO's could leave the firm and try to get a job at another non-TARP receiving firm.

Thus in the end, I would be mildly in favor of such a salary restriction, but with some serious reservations.

3 comments:

AMR said...

My comment may be a little more political rather than economical but I'll say it anyway. Do we really want a society that allows the federal government to set wages-even if it CEO wages? In normal circumstances when the government subsidizes something they do not set wage controls or price controls. I think we have to clearly define the difference between a subsidy and a "bailout"-we could just call the bailout a loan. If a highly skilled individual decides to leave a company that is having wages set by the federal government then won't that company be worse off because of his/her absence,which probably means that the taxpayer is worse off on numerous fronts? Another point that must be entertained is that if one company gives the money back to the federal government then that puts significant political/market pressure on other firms who took TARP funds to pay them back immediately otherwise those firms may lose value, lose market share and probably will lose high skilled employees. The implications of this wage cap by Senator McCaskill (D-Missouri)are to severe in my opinion. The country and the economic welfare of the firms involved will be worse off.

Jerry S said...
This comment has been removed by the author.
Jerry S said...

I have two problems with these salary restrictions. First, Geithner said he may not let firms pay back the TARP money because of the "Macroeconomic consequences". Basically, If several of the banks are able to pay back the TARP money the other banks stock may plummet and people will be very hesitant to do any kind of business with them because of the "stigma" of not being able to pay back the TARP money.My second problem with it is more political. This kind of thing eerily reminds me of Ex post facto laws which is one of the reasons we had our war of independence from Great Britain. However, I also see the need for the government to hold companies accountable for borrowing our money. I don't envy Bernake or Geithner in the slightest, these are hard decisions that are sure to draw populist anger from both sides of the aisle.