Effect of Executive Compensation Cap

February 25, 2009

How Will Obama’s Executive Compensation Cap Affect Companies in Trouble?

It’s official. The unethical use of bailout money that so many of us feared would come when the government wrote big checks to save our economy has arrived. In fact, according to a recent L.A. Times article, “Wall Street Finds Ways Around Executive Pay Caps,” $20 million of the bailout money handed out last year by the Bush administration went to executive compensation bonuses. These, mind you, are top executives at companies that failed. Do you think they are inspired to do better work now that they were rewarded for running their businesses into the ground?

In response, President Obama demanded limits on executive compensation just two weeks into his tour of duty at the White House. He announced the executive compensation changes on Feb. 4, 2009 and, according to that recent L.A. Times article, Obama’s executive compensation cap does the following:

Obama’s Executive Compensation Cap

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puts a $500,000 limit on annual executive compensation
reins in executive severance packages – a.k.a. “golden parachutes”
requires that typically lavish parties are kept in check for all companies receiving bailout money

Taking action against injustice is a noble choice. There’s no question. The recent bailout has definitely raised some serious ethical issues in compensation and bonuses. But, any HR and compensation experts who have been around a while know that good intentions from the government often wreak havoc on employee compensation plans, hiring and firing. FMLA, anyone?

Can Government Effectively Regulate Executive Compensation?

To study government regulations’ effects on HR and compensation, let’s review the Family and Medical Leave Act of 1993. According to the Department of Labor’s Web site’s section 825.100, “What is the Family and Medical Leave Act?” the FMLA allows eligible employees to get up to 12 weeks in 12 months of unpaid, job-protected leave to care for a family member’s or their own health and well-being. There’s a lot more information there, but that is the gist.

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Sounds like a noble intention, right? Much like Obama’s executive compensation cap. But, how did the FMLA work out in reality?

The FMLA is hard on businesses, large and small. Administratively, it has created a great deal of paperwork that takes precious time from HR managers’ and small business owners’ busy days. It forces small businesses to function without certain employees while holding their spot until they return. As noted in a recent Orlando Business Journal article titled, “Anyone Recall the Fallout From the FMLA (Family and Medical Leave Act)?” a 26 week leave is half of a working year so, “’You are going to have to bring somebody in to train.’ And once the injured or ill person returns to work, ‘you’ll have to let the other person go, which puts an extra burden on businesses,’” according to Andrew McPherson, president of Seretta Construction Inc., based in Apopka, FL.

In addition, as with any benefit, abuses happen. Crafty employees who are dealing with disciplinary actions from their workplace may find a way to use the FMLA to take a break from work but still keep their job. Or, someone who simply wants to get away for a while may be able to create a reason to take time off under the FMLA, creating extra work for their employer and not contributing to business success.

Furthermore, sometimes those who really need the FMLA can’t take advantage of it. Why? According to a recent American Association of University Women blog titled, “Family and Medical Leave Act’s 16th Anniversary,” many Americans don’t benefit from the law because they can’t afford to take unpaid leave. Who does it really help?

Since its inception, the FMLA has been modified. According to an article by BusinessKnowHow.com titled, “FMLA Changes for 2009 – The Facts,” some changes took effect January 16, 2009 but they deal mostly with employees who are members of the military and their family.

It’s not that the government shouldn’t ever have a say in employment matters, but it should occur only with thoughtful consideration for the administration and fall out that comes. After all, executive compensation is only one part of the big picture. And, what is executive compensation exactly? These are questions that should be ironed out before making bold, dramatic moves.

What’s Government’s History with Executive Compensation Packages?

President Obama isn’t alone in his efforts to cap executive compensation. Former residents of the Oval Office have tried to regulate executive compensation. According to that same L.A. Times article, in 1993 President Bill Clinton worked to control executive compensation by limiting the amount of money a company can deduct in salary for top executives from their taxes. What happened as a result? Companies adjusted by handing out more stock options and executive compensation skyrocketed.

Whoops.

Could Obama’s plan have similar unpredictable negative consequences? What do you think?

Regards,

Stacey Carroll, M.B.A., SPHR

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