- The Washington Times - Sunday, August 23, 2009


In addressing executive compensation, Congress unfortunately appears to be closing the barn door on executive pay packages long after the cows have left the barn. History shows this sort of policy reaction does little to address past mistakes but ensures there could be future mistakes.

Consider the Clinton administration initiative in the 1990s to reduce mortgage-lending standards to accelerate homeownership. Both the secretary of housing and urban development and Congress were willing to participate in this sort of market risk-taking. After all, homeownership is part of the American dream. Their regulatory leniency was well-intentioned. However, lax lending standards led to the subprime mortgage meltdown and precipitated the current economic malaise.

Fast forward to the present, when congressional leaders are questioning executive pay at financial firms that suffered major losses or failed as the mortgage market and its derivatives unwound. This time, they want to establish compensation practices for financial firms in order to limit systemic risk. Again, the near-term goal is admirable — we all seemingly would be better off if there were ironclad rules that mitigated risks and still allowed the economy to recover. But again, the unintended consequences of making such rules could be harmful.

What Congress seems to overlook is that those high earners it perceives as getting paid excessive sums have choices. They can and will migrate toward career opportunities they see as most attractive. If some of the proposed regulations, such as limiting total compensation in Troubled Asset Relief Program companies, were implemented, talent inevitably would migrate toward companies or countries without such invasions, and our standing as the capital of capitalism could be in jeopardy.

Why should we care? Because to the extent that legislation or regulation aimed at correcting past behavior instead inhibits future behavior and economic growth, our most talented citizens will start looking for preferable destinations for their careers, an unintended consequence likely to have dire consequences for our economy and all its constituencies.

Some isolated cases of exorbitant pay coupled with dismal corporate performance are indefensible. What gets lost in the anger over these outliers is that long-term demographic trends are not in our favor. Over the next two decades, tens of millions of baby boomers will be retiring, leaving a huge talent hole that will be difficult to fill. Adding compensation restrictions is like tying one hand behind our back as we embark on the greatest war for talent in history. Why not just cede the fight to other countries that do not have such limitations?

Limiting corporate greed, like encouraging homeownership, is a noble endeavor. However, we would all be better served if well-intentioned efforts were applied to preserving the greatest asset our nation has to offer — the talented, educated and innovative leaders that make up the backbone of our economy and global financial leadership.

Ignoring this risk as we navigate out of today’s economic downturn could result in a far greater and far deeper decline in the future. History has proved this to be true.

Steve Giusto is managing director of Korn/Ferry International, talent management consultants.

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