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February 4th, 2009

Can Congress Limit Executive Salaries?

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The Obama administration has announced that executives at certain banks which have received TARP funds will have their pay capped:

The Obama administration outlined plans today to tighten restrictions on executive compensation for future recipients of federal aid under the government’s financial rescue program, but the large majority would be able to opt out of most of the limits.

Companies that take the largest chunks of help would face mandatory restrictions on compensation for their senior executives: no more than $500,000 in salary, and no additional compensation other than shares of the company’s stock that can only be redeemed after the government investment is repaid.

…The mandatory standards would apply solely to companies that receive assistance beyond what is generally available to other companies ["exceptional assistance"].

Without getting into whether this is a good idea or a bad idea — I can see both sides of that issue, and I invite comments on why you think so — I have a question that I haven’t seen asked or answered yet:

Assuming that the affected excutives signed a contract with their employer, and that the contract spells out their compensation, by what statutory authority can Congress unilaterally void private-sector contracts – particularly where no crime has been alleged?

All the news accounts just presume that such authority exists, but what is it? Is there a law by which Congress can do this? If there is, I haven’t heard of it. Any lawyers out there want to take a stab at this?

This part of the article should give us all pause:

A senior official said the administration intends the rules as the first step in a process to make sure that corporate leaders are guided by long-term interests and not lured into the type of risky bets that have undermined the economy.

What does that mean, exactly? That mean that Congress will decide what kinds of loans they will be allowed to make, and at what terms? And who will decide what those “long-term interests” are?

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7 Responses to “Can Congress Limit Executive Salaries?”

  1. Tim Manni Says: February 4th, 2009 at 3:19 pm

    Is simply receiving government money enough to warrant new conditions or even enough to void a private contract?

    What about other companies and industries (like say Amtrak) that the gov has poured money into in the past, and will get more money if the House’s version of the stimulus package is passed. Can the gov intervene and renegotiate their salaries — simply because the gov has given significant amounts of money? I’d say $850 million to Amtrak is pretty significant…but that’s just me.

    To the best of my knowledge, no document exists that puts specific terms and conditions on the banks taking the first-half of the TARP funds.

  2. Kerry Says: February 5th, 2009 at 9:56 am

    Executive compensation was limited to $500k/year for companies that received loans from the government, but typically isn’t executive pay pretty low anyways? Executives do receive lots of additional bonus pay in the form of restricted stock and options. Since the compensation limit isn’t across the board for all compensation, it really isn’t impactful and probably only appeases the general public

  3. Paul Havemann Says: February 5th, 2009 at 4:49 pm

    Kerry, you’re probably right; a number of Wall Streeters — and Congressfolk — know that this is largely a PR ploy. But it’s a populist PR ploy, since Wall Street execs are the pinata du jour.

    To the extent that the cap does have an impact, it will be the unintended consequence of leaving the affected companies without the sort of talent needed to run them — since job applicants will typically look for a job that pays the most.

  4. David Dzidzikashvili Says: February 9th, 2009 at 8:21 pm

    I think it was a right decision to limit CEO salaries at 500K for the companies that are getting taxpayer money. In general I strongly disagree with government intervention in private business matters, but since these companies are utilizing my money and your money and the money that belongs to all Americans, we have the right to limit their payroll, especially after the embarrassing facts of CEOs using bailout money for lavish parties, private jets and unreasonable bonuses. Once they pay us back the money owed, they can have all the bonuses and salaries they want.

  5. “Bank Crisis, What Bank Crisis?” | Mortgage Loan Refinance Guru Says: October 15th, 2009 at 7:40 am

    [...] “Can Congress Limit Executive Salaries?” “2008 Capitol Hill Bonuses Highest in Years” “The danger of vilifying Wall Street“ [...]

  6. tom c Says: January 20th, 2010 at 1:14 am

    If one concludes that the government has no right to restrict private sector compensation, why not make only one new law. The shareholders vote on compensation via proxy.

  7. Tim Manni Says: January 20th, 2010 at 10:01 am

    Hey Tom,

    Thanks for commenting. This battle is far from over!

    -Tim

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