Limiting Executive Compensation and Lessons Learned from Abroad

As BofA pays off its TARP money, allowing it to avoid the oversight of the Pay Czar and to pay compensation essentially without limits, and Goldman opts to pay compensation that, on the present course, will equal more than $700,000 for every employee, it is clear that the US has done nothing to fix the problem of executive compensation.  It is also clear that public pressure carries little weight in determining these amounts. 

The British (with support from the French) have taken steps to fix the problem in the short term.  The British Government announced that it would impose on bonuses above L 25,000 (somewhere around $42,000) paid by banks a tax of 50%.  The tax comes just at the time boards are gathering to decide on bonuses for top officials.  It essentially forces the board to step back and reconsider the amounts that will be paid. 

Paying lavish bonuses unconnected to the merits will result in a substantial additional cost (the 50% tax) that essentially comes out of the remainder of a company's earnings that ordinarily would inure to the benefit of shareholders.  In other words, paying lavish bonuses without a strong justification will bring howls from shareholders and result in substantial criticism on the board.

If the bonuses are truly deserved, they should still be paid, even with the additional charge.  If they are truly deserved, the board will be able to make the case to shareholders about the need for the payments, irrespective of the tax.  

Bonuses should only be paid if truly justified.  This tax will help ensure that this happens.