Executive Pay

The current line for the Left is that executive pay is too high and something needs to be done about it. That's not how they phrase it. They toss around terms like "Wall Street" and "the Rich" but that's what they mean. Executive pay has changed several times over the last few decades, almost always in response to government policies.

From the Great Depression through the early 1980s, most executives worried about tax shelters. They worried a lot. Tax rates were confiscatory. JFK lowered them some but even in the 1960s and 1970s, it was a national passion trying to keep a hold of your money. Since the alternative was to have over half of your income taxed away, there was a significant return on doing this.

During this period tax-free benefits increased greatly. Expense accounts were lavish. I knew one man who owned a trucking company and had his Mercedes and his private plane listed as company vehicles.

In the early 1980s, Congress under Reagan make some major tax cuts. After that, taxes were low enough that people moved their money to investments that were taxable but paid higher returns. Over time, pay was changed to eliminate the tax shelters and go to direct pay.

When Clinton took office in 1993, his Secretary of Labor, Robert Reich, felt that executives were being paid too much and that their pay did not reflect their performance. He wanted their pay directly tied to company earnings. His solution was to replace pay with stock options. He used the power of the government to convince most corporations to switch.

This had a few unintended consequences. One was that it fueled the Dot-Com bubble. The other was the charge that executives were more interested in manipulating stock market prices than in making the best long-term decisions for the company. Again, this was seen as a crisis that the government had to involve itself in.

The new solution was to tie pay to profits as an annual bonus. These would be based on an individual's business unit, not company performance in general.

Which brings us to today. When your employer makes billions, it only takes a small percentage to get a seven-figure bonus. Moreover, it is quite possible for your unit to have been profitable even when the business in general lost money.

So the immoral bonuses that bank executives were getting last year came about directly because of government influence on how companies are paid.

The newest line is that the rich control too much wealth and that the government needs to redistribute it. That is why President Obama announced that he will support extending the Bush tax cuts, but only on people making less than $200,000 ($250,000 for families). Others are not so generous. Les Leopold of Huffington calls for a return of steep progressive taxes in order to pay for a new, larger stimulus.

This was tried at the beginning of the Great Depression. In fact, many economists believe that this is why there was a Great Depression in the first place. Trying to redistribute income can wreck an economy.