A few schoolyard rules on executive pay

The Obama administration’s plan to review the executive compensation packages of banks and big businesses that have received federal bailout money has sparked active debate.

I think the issue should be governed by the simple schoolyard rules my friends and I instituted many years ago.

Our rules were based on common sense, and the consequences for failure to obey were clear, too.

Here is an example of the rules in action:

My friend Gary had been borrowing money from our other friends to buy ice cream between stickball games, as well as other staples such as bubble gum, comic books and super-pinky balls (manufactured by Spalding, but for some reason called Spaldeens by generations of New Yorkers).

A few days later, the kid who loaned him the money informed him that he had to pay it back soon or face a “knuckle sandwich.” Gary turned to his buddy Tommy for a loan to pay back the other kid.

Tommy quickly fronted the 10-spot.

(Who knew we stumbled upon loan syndication?)

A week later, Gary got a $20 birthday gift from his grandma. He went on a spending spree, which didn’t amuse Tommy, who reminded Gary about the bailout.

“No wild spending until you pay me back,” was the sanitized version of Tommy’s message, delivered with a punch in the arm to ensure receipt.

Gary got the point and promptly gave Tommy $10. Business concluded, the boys headed off to the schoolyard to continue playing stickball.

Fast-forward a few years, and it seems that executives of failed companies who come to the government with hat in hand looking for cash infusions would do well to follow the example set by Gary — and acknowledge the power of Tommy.

Executives at bailed-out firms should understand that the guy controlling the money (in the banks’ case today, he is a Timmy [Geithner], not a Tommy) will be calling the shots. And since that is the case, the executives rightfully should be subject to intense scrutiny, limits on compensation and reins on bonuses and lavish retirement packages.

Why? Because the executives pleading for help obviously couldn’t handle their companies’ finances.

Nevertheless, talk of compensation limits is controversial. Many companies have complained that limiting executive pay and bonuses will damage their ability to attract and retain top talent.

My response is twofold: First, how much of an incentive do these top executives need? If they are so unmotivated, companies shouldn’t hire them.

Second, where exactly are they going to go?

The current job market should deter employees — even top ones — from leaving. If someone wants to venture out into the cold, cruel world, many qualified replacements are lined up to grab their job.

Don’t get me wrong. I have always believed that success should be rewarded, and I bet most Americans don’t begrudge executives who are rewarded for a job well done.

But let’s make sure the “well-done” part is actually there. Lavish rewards for monumental failure are another matter entirely.

And what really ticks off Americans is when those outrageous payouts are funded with taxpayer dollars.

For specifics, look no further than American International Group Inc., which paid out $165 million in executive bonuses after receiving $182.5 billion in bailout money.

I am not sure where Tommy is living now, but we sure could use him to give those AIG guys and a few others a punch in the arm.

Jim Pavia is the editor of InvestmentNews.

Related Topics: Just Thinking