Congress Could Cap Compensation

By Daniel Indiviglio

Yesterday I wrote about a (poor) proposed method of attempting to curb already promised executive pay for bailout firm employees. In doing so, I created a poll asking readers whether bailout firm employees with contracts in place should still get the full payout promised, specifically if they did not contribute to the causes that led to the crisis. (As I write this, 63% say give them the bonus, 37% say not to.) That sparked several comments raising the point that these firms should have failed, and then those contracts would have been invalid anyway. That's quite right. It's also completely irrelevant.

Here are two excerpts. First a comment from msully:

While I don't like the idea of changing contracts after the fact, many of these institutions SHOULD have failed, and their employees thrust back into the market, required to sell themselves again to gain another contract.



Another from Ulysses (not yet home):

Simple question: What would these individuals have been paid if their firms had been allowed to collapse? Another: Assuming no intervention by the government for ANY firm, in any industry; what is the expectation of "bonus" in THAT hypothetical market? Another: In a global economic collapse, where would these high paid individual go, to find multi million dollar employment?



I take these comments to imply that the promised bonuses in question never would have been paid if these firms had been allowed to fail. That's true. The problem, of course, is that the government didn't allow that.

Not only did they not allow it, but they knew exactly what they were getting into. The architects of the bailout -- Hank Paulson and Ben Bernanke -- were both well aware of the kinds of bonuses that investment bankers get, and contract guarantees that are often in place at those firms. Paulson spent most of his life getting huge bonuses as a Goldman Sachs investment banker. As management there he was almost certainly involved in creating those contracts for others. They knew that this problem would manifest itself, but they went ahead with the bailout anyway.

If this was really a concern, along with the bailout package, Congress could have passed some meaningful legislation that would have nullified big contracts for employees working at bailout firms. Does Congress have the power to tear up contracts? Of course: their legislation does this all the time. For example, the credit card regulation they passed last spring tore up contracts between credit card companies and consumers, causing those companies to have to re-write them.

Congress can still stop these bonuses if they want, through legislation. I just doubt that they will. I think deep down, Congress wants these executives to get their bonuses. After all, if they didn't, then they would have passed that excise tax legislation they were threatening during the fiasco that ensued after the first round of AIG bonuses were paid out. That proposed legislation turned out to be just a lot of huffing and puffing from politicians. I wrote a piece a few weeks back about several methods that Congress could take, however, if they wanted to get serious about it.

Obama's compensation czar doesn't have the same power as Congress. He cannot tear up contracts. That's why the deck is stacked against him. If the Obama administration is really concerned about these contracts, they should stop sending a relatively powerless appointee after the problem and enlist the strength of Congress. I just doubt that Washington is really as concerned as it claims to be.

This article available online at:

http://www.theatlantic.com/business/archive/2009/07/congress-could-cap-compensation/22271/