In my May 4 column, I wrote about the problems that often occur when adverse parties tinker with compensation plans. This is particularly true when government is the adverse party, for the dynamics of profit-making do not always fit into their thinking. In the article I expressed the hope that current moves in this area by government did not become a trend.
Well, that was, to say the least, a false hope. According to the lead article on the front page of the May 13 Wall Street Journal, it is obvious the Obama administration will seek ways to expand its control over compensation plans. In case you missed it, I would like to quote from the WSJ article.
“The Obama Administration has begun serious talks about how it can change compensation practices across the financial services industry, including at companies that did not receive federal bail-out money, according to people familiar with the matter.
“The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long term performance.
“Administration and regulatory officials are looking at various options, including using the Federal Reserve’s supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.
“At the same time, House Financial Services Committee Chairman Barney Frank, D.-Mass., is working on legislation that could strengthen the government’s ability both to monitor compensation and to curb incentives that threaten a company’s viability or pose a systemic threat to the economy.
“It is unclear how such a bill would fit with what the Fed and others are already considering. But any legislation passed would make it harder for policy makers to dial back limits once the crisis subsides.”
Or, to put it bluntly, once such legislation passes, we are stuck with it even if it is not needed or wanted. The camel’s nose is already under the tent; it is just a matter of time before the animal fills the tent. Congress has played a heavy role in the financial crisis, first by tearing down the walls between banks and certain aspects of commerce and also by putting pressure on lenders to open up to sub-prime borrowers.