Barney Frank's CEO Pay Fantasy

I think Barney Frank is a good man with fine intentions. But he is dead wrong to have insisted upon attaching limits on financial executives' pay to the $700 billion plan reached yesterday to bail out the country's troubled financial institutions. Frank, chairman of the House Financial Services Committee, is wrong not only about the wisdom of the government regulating what private companies pay their CEOs, but also about Congress' history of meddling with private-sector paychecks. 

"This is the first time in the history of the United States that anything has been done by the Congress to curtail excessive CEO compensation," Frank said about the plan yesterday. 

Wrong. 

Set aside for a moment the quite thorny issue of how to define "excessive" — as well as the general consensus among our elected leaders that the bailout is an unfortunate, if necessary, incursion by government into the free market — and consider the following: 

In 1993 Congress enacted legislation that drastically altered the tax law surrounding executive compensation, rescinding the tax-deductibility of any cash compensation over $1 million. Supporters of the measure thought it would force companies to curb runaway executive compensation. Instead, it prompted smart people in private sector, chiefly in Silicon Valley and on Wall Street, to begin granting executives gobs of stock options, which were not subject to the new tax. 

So, rather than keeping executive pay down, this measure contributed to the orgy of options grants in the late 1990s and early 2000s that fueled the dot-com bubble and a wave of accounting frauds involving companies such as Enron, WorldCom, Tyco International and Adelphia Communications. In many of these cases CEOs and other top-level executives had so much financial gain riding on their stock prices that they succumbed to accounting chicanery that would artificially inflate those stock prices. The collapses of these corporations and the collateral damage to financial markets cost investors — including mutual fund shareholders and beneficiaries of union pension plans, 401(k)s and IRAs, the very Joe Sixpacks that Frank and other Democratic members of Congress are pandering to with this addition to the Paulson bailout plan — tens of billions of dollars.  

Frank is right to complain about the prolonged failure of government to sufficiently regulate the financial-services sector, a failure that contributed greatly to the crisis from which we are now struggling to emerge. He and his peers should push for more sensible oversight as part of a broad restructuring of our financial-regulatory infrastructure, once the dust settles from this bailout. I believe firmly that a limited dose of thoughtful, balanced government regulation of the private market is absolutely necessary to prevent capitalism, the best organizing principle mankind has yet devised, from eating itself. But attaching unrelated, willy-nilly limits on the free market such as this harebrained executive-comp measure — and then claiming such nonsense as an unprecedented victory for the Little Guy against The Man — is disingenuous at best and, indeed, as the history of legislative unintended consequences illustrates, potentially harmful to our country.