During the past few decades, high salaries, luxury benefits and seemingly endless company spending have become entrenched in American business culture. The glitz of Wall Street always has been one of the draws for ambitious business majors. In the new economy, however, if corporate executives are hoping for government assistance, these students may have to alter their expectations of a high-power job’s rewards.
Last Wednesday, President Obama released a description of new rules that would cap the pay of corporation leaders vying to be part of the next bailout phase. His ideas reflect a growing concern among Americans about the path their tax money is taking and the role business leaders play in getting the country back on its feet.
Mr. Obama’s plan specifically intends to address taxpayers expressing concern about “handouts” to multibillion dollar industries. Since the bank bailout, there has been a persistent and unanswered question hanging in the political air: If the average American is scrimping pennies, should the failing leaders of businesses receive hard-earned tax money? Mr. Obama has finally addressed the issue, calling the practices of Wall Street’s excessive pay scales “shameful.” In response, he is orchestrating an answer to populist anger. He has called for a change in the way American businesses compensate their leaders. Consider it a little like an overzealous teenager, whose parents have finally reclaimed his or her first credit card.
The president’s plan would cap senior executive salary at $500,000. Mr. Obama himself makes around $400,000 a year. In addition, severance pay would be revised — perhaps banned — and stock incentives restricted. The boards of corporations would monitor more closely the perquisites of executives, such as club memberships or extravagant transportation costs. Instead of lavish fringe benefits, more long-term benefits could reward executives for their good work.
Restricted stock is one suggestion for committing leaders to investing in the health of their own companies. Incentives that demand a quality of service from executives and compensate them appropriately could address some principal-agent problems in American corporations. The plan’s hope is to foster better corporate management by holding leaders more accountable for the health of their companies. High salaries have attracted talented and experienced business players to American industries but have not always encouraged them to be on their best behavior 24/7.
Grounding executive spending to a realistic level could have positive effects for the American corporate culture. It appears the climate of the American marketplace has shifted from the days of the 1987 movie “Wall Street,” in which corporate spending seemingly had no ceiling. The new use of the term “recession chic” points to the change in attitude. Yet, it is hard to judge whether every industry can adapt. There is concern that regulations will discourage corporations from asking for help when they desperately need it. The economic recovery may delay even further if business leaders refuse bailout policies. To buffer the effects, the new rules would not apply to corporations receiving tax money from the first phase of the bailout. If corporations included in the first bailout phase require more money, they are not required to decrease their stock awards. Moreover, in true Washington form, loopholes exist for those who need assistance and absolutely refuse the new rules. Corporations can put their pay scales to a nonbinding shareholder vote to keep their current policies.
Though hard to believe, it is a rational fear that top executives would choose to “tough it out” rather than submit to pay decreases. The New York Times recently reported on the spending habits of the New York City business elite, estimating that top business executives could spend, before taxes, $45,000 a year for a nanny, $96,000 for mortgage and $32,000 per student for private school. Running a household budget of those proportions on $500,000 a year? Not likely. Those executives who turn to the government must learn to scale down their lifestyle choices. The new rules, though intended to change the public accountability of business leaders, will inevitably have long-term effects on executives’ personal lives. Idealistic perhaps, but a change in salary design — at least for a little while — could finally debunk Gordon Gekko’s old mantra. Greed is inevitably not good for a stable and successful economy.
Lauren’s column runs biweekly Thursdays. She can be reached at l.palmer@cavalierdaily.com.
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