Should the Pay Czar Go Easy on GM?

When General Motors was bailed out back in 2008, it had to endure the rules that went along with accepting federal funds. Perhaps the most annoying requirement was the restraint on executive pay. It's pretty tough to rehabilitate a sick company when you can't attract high-priced talent to help fix its problems. For this reason GM will ask that the pay rules be relaxed. Should the government allow it?

John Crawley from Reuters reports that Co-Chief Executive Dan Akerson will suggest that the Treasury ease pay rules:

"We have to be competitive and retain talent," Akerson said in response to a question at the Economic Club of Washington, D.C. "We're starting to lose them now."

Akerson said he would meet with the U.S. Treasury's special paymaster on Friday to discuss the issue of executive compensation.

GM is in a different boat from most of the other large firms that were bailed out. Most big banks paid back the government relatively quickly and could then pay their executives whatever they wanted. For them, the pay restrictions amounted to a short-term annoyance, but not a long-term problem. It's also worth noting that almost all big financial firms took the bailout and were under these restrictions simultaneously. That meant that talent didn't have as many competitors to flee to that could offer better pay.

Contrast that with GM's situation. Its time horizon to be free and clear of the government is much longer. If GM can't pay executives competitively for an extended period, this could debilitate its ability to recover. After all, why would a great auto executive work at GM if Ford, Nissan, or Hyundai will pay several times as much?

The populist outrage about the bailouts is really where these pay rules originated. The idea is that since the government had to save these firms, its employees shouldn't be receiving lavish pay packages. Taxpayer money shouldn't be spent to reward executives who only have their jobs thanks to the government rescue.

But this idea is full of internal conflict. Are taxpayers better off sticking it to these companies or allowing them the flexibility to fully recover, so that they can pay back the bailout that they received? It's a hard call, since both arguments are fairly strong.

Ultimately, this reveals the problem with bailouts. The natural populist response is to punish the firms that needed the bailout. But really, taxpayers must root for these companies to ultimately succeed if they want to get their money back. Moreover, what's the point of saving companies only to force their failure at a later date?

Perhaps the best strategy here for the Treasury would be to compromise on a case-by-case basis. GM needs to compete in order to make taxpayers whole. If higher pay for executives is necessary for that end, which is plausible, then the company needs to explain why. If it provides the Treasury with industry comparable pay packages of executives in similar positions at competitor firms, and also explains precisely the role that each of these highly paid executives will play to further the company's recovery, then the Treasury should make exceptions.

However, there may also be ways to structure pay to minimize cash in compensation packages. For example, if a large portion of compensation is awarded in GM stock that does not vest until the company has paid back the bailout, then this would provide additional incentive to these executives and limit their immediate cash compensation. Unfortunately, there's no perfect solution to this problem, because the government shouldn't be involved in the business of bailouts in the first place.