Robert Murphy

Yet that’s not even the actual limit. Corporations can still pay their executives more than $500,000 in compensation, even if the corporations receive government bailouts. They can give stock options to their top execs, and that’s fine with the government. They just can’t write a paycheck for more than $500,000 per year. And remember, this is the salary cap being put on people who squandered so much money that they claim they need emergency taxpayer subsidies to prevent imminent collapse.

Incidentally, I am a staunch supporter of the free market. I have publicly defended the use of “golden parachutes,” in which corporations agree to let a CEO earn big bucks even when he gets fired for bad performance. The reason is that you don’t want the CEO job to be terrifying to the applicant.

Think of it this way: If you are on a board directing a company, you want to pick a really aggressive, no-nonsense, very intelligent person to run it. But at the same time, you want someone who realizes he or she can’t control everything, and that the best-laid plans might go awry. You want someone who realizes his own limits. You don’t want to hire someone who thinks he can’t possibly fail.

And so that type of candidate, who realizes he or she might get let go in a few years, is not going to relish a compensation package as CEO where the payout is $20 million a year if things go well, but only $100,000 and a kick in the pants if things go poorly.

Ironically, if the CEO’s incentives were the lopsided arrangement I just discussed, then the CEO would adopt an extremely narrow, short-sighted mentality. Only when corporations offer a more balanced compensation package—where the CEO does well even if the company tanks—will he have the right incentives as a steward of the assets. The Board of Directors never wants the CEO to feel trapped, and that he needs to turn the numbers around on the books in three months or else his pay drops by $19 million.

Nothing good will come out of continued taxpayer subsidies to big businesses. It makes the average citizen poorer and brings politics into the marketplace. The politicians in DC need to stop doling out tax dollars to people who aren’t good with money. Rather than telling corporations how to run their affairs, the politicians should butt out and let competition handle it.

Robert Murphy

Robert Murphy has a Ph.D. in economics and is the author of The Politically Incorrect Guide to Capitalism (Regnery 2007).

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