Why limiting executive pay is a bad idea


Amid increasing the hue and cry from the Obama Administration for the need to regulate the pay of executives of all financial-services firms – and maybe even of all publicly traded corporations – comes a bit of reason.

In a piece highlighting the dangers of regulating executive pay, George Mason University economics professor Don Boudreaux makes a straightforward case why such action would be wrong:

Proponents of Obama’s proposal suggest that if government limits the pay that banks and brokerage houses offer their executives, these firms will have lower costs. These lower costs will mean better deals for customers, such as lower interest rates for borrowers and lower brokerage fees for ordinary citizens who buy and sell stocks. What can be the downside of such regulation?

Because it’s not our money. If the CEO delivers good value in return for his salary, the firm flourishes and the owners profit. If the CEO doesn’t deliver good value, the firm flounders and the owners suffer losses. Owners have no more interest in overpaying the executives they hire to manage their firms than homeowners have in overpaying the repairmen they hire to fix their leaky basements.

Boudreaux goes on the write that among the many reasons top corporate executives are paid handsomely is that they’re worth it. “Managing a firm is difficult, and the talent to successfully perform these difficult tasks is rare and very valuable,” he writes, adding:

How many of us could oversee organizations employing thousands or even hundreds of thousands of employees? How many of us have the judgment necessary for deciding when to expand a product line, close a factory, or relocate a headquarters? How many of us have the people skills required to ensure that teams of workers perform together productively, day after day?

The honest answer is “not many.” Landing top executive talent rather than only middling executive talent can raise a corporation’s net worth by billions of dollars. The result? Companies compete vigorously for this top talent through higher salaries.

Top talent can make all the difference between success and failure. Outside of a significant pay increase, a top executive has little reason to leave a post at a company that faces relatively little uncertainty and turmoil in order to join a firm facing lots of uncertainty and turmoil. If government steps in to prevent this incentivization, businesses could shutter.

2 thoughts on “Why limiting executive pay is a bad idea

  1. The reason Barak shouldn’t regulate the pay of CEO’s or anybody else is that it’s none of his damn business. This is Capitalism and people make what they can command. Not being a sports fan, I don’t give a flying flip what Michael Jordan and Shaq make. It’s of no consequence to me. I don’t spend any money on tickets, memorabilia, popcorn at games etc. But, apparently there are folks out there who do. So, trickle down is trickling up to Mike and Shaq to the tune of millions. Good for them. Are they worth millions? Not to me. But, Eva Mendes is. They oughta pay her twice what Shaq makes.

    • Couldn’t agree more, davisoftheapes1.

      A person’s services are only worth what someone else is willing to pay for them. Trying to regulate executive pay is nothing more than an example of class envy being used for political gain.

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