Should the Federal Government Regulate Executive Pay?

Watching the 2012 Republican Primary has me thinking about the role of government and it reminded me of a debate I participated in during one of my MBA classes.

During my Fall Semester of 2008, I was in the midst of my Management of Finance course at The University of Arizona Eller MBA and the US was facing one of its largest financial meltdowns since the Depression. The US government stepped in with billions in bailout money to save several banks, Fannie Mae and Freddie Mac and the GM and Chrysler automobile companies. Several US federal officials and politicians proposed that the top executives for these companies should have their salaries and bonuses limited to $500,000.

My finance class staying current with the times debated whether the US government should play a role in regulating executive pay. I assumed since my class was part of a MBA program, there would be a bias against such regulatory measures and these future executives I was surrounded by would argue to let the cash flow. To my surprise, many in my class were in favor of the regulation for executive pay.

I found myself utterly shocked! Here I was in the middle of an MBA course with the future leaders of enterprises and most were cheering for the government to possibly restrict their future pay. I asked myself “did I sign up for the MBA program or did I accidently enroll in Masters of Public Administration?”

One of the students shared that he would be willing to take an executive job at one of the companies for the $500,000.

I asked my fellow MBA colleague this question to help offer a different perspective… “If the US Government can regulate executive pay, couldn’t they just as easily regulate NFL pay since most games are played on government land? I can throw a football and I’d only charge $500,000:)”

I went on to explain to the class “these companies are facing the toughest times they have ever faced in history and they need the best executive talent available to steer these firms back from the brink of bankruptcy. Remember also that these executives will be personally responsible for the financial statements of the firm due to the regulation created by the 2002 Sarbanes–Oxley Act.”

I continued by saying “finding top executives who would sacrifice their time and talent plus place themselves and their families in harm’s way for a company facing it toughest years in history with the US Government now as one of it’s largest investors would be difficult. I am sure if you” as I closed my argument to the MBA class, “were one of the top talented executives being sought to lead one of the firms, you would argue that this is not the time to start being thrifty.”

The truth be told however, the students were somewhat correct that the government did have some responsibility in providing oversight to these companies they bailed out with tax payer money including the review of the executive salaries. The caveat is that the government’s role is limited to their involvement only as a new shareholder of the company in which they invested, which the US Federal Government found itself being in often at this time.

That’s because executive salaries are set by a corporation’s Board of Directors. The Board of Directors is elected by the shareholders which in turn makes essentially the shareholders responsible for everything from executive salaries to the future operations of the company.

This brings up another popular argument… should the government use tax payer money to make investments in companies on the brink of bankruptcy? We’ll save that argument for another day!