When Government Regulators Set Private Sector Pay

The House has just started debating the rule for H.R. 3269, the Corporate and Financial Institution Compensation Fairness Act, and a final vote on the bill is expected in the early afternoon.

The National Association of Manufacturers sent a “Key Vote” letter to House members yesterday expressing the NAM’s opposition, arguing that the bill would be excessively burdensome and disruptive to companies during tough economic times. Excerpt:

The debate about executive compensation is important; effective accountability is key to preventing excessive abuses. The NAM believes that H.R. 3269 would not provide real solutions but would have serious unintended consequences. Specifically, we oppose provisions that would: 1) require an annual, non-binding shareholder vote on executive compensation; and 2) grant the government authority over employee compensation for certain companies.

By law, executive pay is already disclosed to shareholders with an extensive explanation by the compensation committee regarding the rationale behind executive pay. The NAM believes that communication between investors and management is accomplished effectively through the current process. Requiring shareholders to approve compensation packages would interferes with the directors’ role in to effectively manage corporations, which includes the power to set compensation levels. We also have significant concerns about Section 4 of the bill, which would give authority to government regulatory agencies to review and prohibit pay arrangements for a wide array of employees.

We strongly oppose efforts to grant authority over internal business decisions, including employee
compensation, to governmental authorities, which would set a dangerous precedent./blockquote>The Heritage Foundation released a paper yesterday, “House Executive Pay Legislation Puts Pay Czar’s Boot in the Door.” A key argument is that the tax system also distorts the pay structures.

Rather than removing perverse government incentives, the Obama-Frank plan attempts to solve problems caused significantly by existing regulation with more regulation. New regulations are unlikely to have a better result; most likely they will have spectacular failures of their own. Policymakers should cover their ears and avoid any tempting siren calls for even more government regulation of private-sector pay.

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