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An Alternative Look at Executive Bonuses

By John Kelly

ALG Editor's Note: Americans for Limited Government is pleased to present the first of several pieces from ALG Scholars, students whose feats of scholarship have captured our attention, and now we want to bring them to your attention.

It is no wonder that great thinkers like Locke, Smith, Montesquieu, and the like eschewed government involvement in market-driven institutions. Time and again, we are reminded that government intermeddling produces more problems than it solves.

Take for example the current controversy involving the insurance-giant, American International Group (AIG), over the financial bonuses it recently paid to its employees. It has created almost harmonious uproar among the executive branch, the Democrat-controlled Congress, and even the general citizenry. But are AIG and other bailout recipients who were contemplating similar payouts the only ones with unclean hands?

Back in February, in its haste to have something to show for itself with respect to the bailout, Congress backed off on its attempt to limit bonus compensation. Putting aside the wisdom of the bailout itself, there is ample reason to believe that this move was indeed wise one.

The fact is, top-level executives with the experience and know-how to resurrect these struggling financial institutions are a rare breed. If adequate compensation is not available—adequate relative to compensation that they would be able to command at other major enterprises not currently on dire straights—there is little incentive for them to remain in the hot seat and risk their professional reputation as their company faces impending doom. The safer course would be to “jump ship,” perhaps through a lateral move to a more stable company, and let someone else take the fall.

One could argue, of course, and many certainly have, that these executives are precisely the ones to blame for the current financial crisis, so we would be better off without them. But such an analysis is far too shortsighted—especially when the inquisitors provide so little substantiation for their accusations. For all that most Americans know, the executives under the gun may, in fact, have been the select few at AIG who tried to right the pitching ship. But, of course, we'll never know for sure—since politicians playing to the gallery far prefer blanket indictments to serious analyses.

So, although it started on a wise course, having caught wind of popular umbrage at the first set of bonus payouts by AIG, Congress has done an about-face and is seeking an end-around means for blocking the bonuses it implicitly, if not explicitly, authorized just one month ago. By taxing these bonuses at an astonishing 90%, Congress may be able to recoup some of the $165 million in bonuses that AIG has already paid out, but in doing so, it will be all but ensuring that the bailout will fail.

Two scenarios will inevitably follow. In one course of events, institutions currently participating in the bailout will withdraw, and those considering taking part will not enter out of fear that other compensation programs or even more fundamental internal corporate affairs will become subject to government control. Perhaps the prowess of these corporate executives could salvage their companies without government money, but in any event, the bailout will be considered to have failed because the money apportioned did not lead to the resurgence.

In the alternative, entities may continue to participate but those executives who had the vision and arrived at the figures requested of Congress will leave only to be followed by less competent successors unable to carry out the original plan effectively. Furthermore, it is highly unlikely that the latter course will even be pursued. If the government cannot be trusted to carry out its end of the bargain and will shamelessly go back on its word, implicit or not, financial institutions will refuse to deal with it rendering the bailout a virtual nullity.

Private enterprise has limited experience dealing with the federal government. Actions like those considered here give it little reason to do so in the future. If America wants to emerge from this crisis in a timely manner, it needs for all of its capable leaders to do their part, reliably and without rancor. Congress and the President simply cannot continue chasing away their private sector counterparts with broken promises and bad faith.

John Kelly is an L3 at George Washington University Law School.


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