TARP and Pay for Performance Act

Critics of current policy emanating from the Congress or the Obama administration overuse socialism as a description of its policies they disdain. They might recall that not all undesirable policies are socialist, and the economic system that it describes does not fit the policies that the administration pursues. Nor are the administration's policies yet well enough defined to properly tag them with existing definitions. The evolution of the TARP, formally known as the Emergency Economic Stabilization Act of 2008, illustrates the inchoate nature of policy. The House has voted to amend the Act with the Pay for Performance Act.

The language of the Pay for Performance rewrites current contracts which weaken property rights and this is bad. The pertinent language is in bold.

‘(1) PROHIBITION- No financial institution that has received or receives a direct capital investment under the Troubled Assets Relief Program under this title, or with respect to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a Federal home loan bank, under the amendments made by section 1117 of the Housing and Economic Recovery Act of 2008, may, while that capital investment remains outstanding, make a compensation payment, other than a longevity bonus or a payment in the form of restricted stock, to any executive or employee under any existing compensation arrangement, or enter into a new compensation payment arrangement, if such compensation payment or compensation payment arrangement--

The act does not define how pay should be related to performance. Instead it establishes a committee to report back to the Congress.

‘(1) ESTABLISHMENT- There is hereby established a commission to be known as the ‘Commission on Executive Compensation’ (hereinafter in this subsection referred to as the ‘Commission’).

‘(2) DUTIES-

‘(A) STUDY REQUIRED- The Commission shall conduct a study of the executive compensation system for recipients of a direct capital investment under the TARP. In conducting such study, the Commission shall examine--

‘(i) how closely executive pay is currently linked to company performance;

‘(ii) how closely executive pay has been linked to company performance in the past;

‘(iii) how executive pay can be more closely linked to company performance in the future;

‘(iv) the factors influencing executive pay; and

‘(v) how current executive pay incentives affect executive behavior.

‘(B) CONSIDERATION OF PROPOSALS- The Commission shall consider, in addition to any recommendations made by members of the Commission or outside advisers, the effects of implementing increased shareholder voice in executive compensation.

Many experts who have studied executive compensation believe that current rules used by corporations are stacked in favor of executives and not shareholders. Rules that alter the balance of corporate control from the executives to the shareholder without dictating a salary range could improve corporate performance. Rules that set a salary range rob owners of an important right, determining compensation, and the new standards would be either codified, thus slowing market reaction to changing human resources, or entrust salary determination to a Congressional body with no proper interest in corporate.

Stuart Varney, a Fox business channel host, describes in a Wall Street Journal article ("Obama Wants to Control the Banks,") his misgivings about the amending act. He does not like it or the apparent heavy handed method being employed to implement it.

I must be naive. I really thought the administration would welcome the return of bank bailout money. Some $340 million in TARP cash flowed back this week from four small banks in Louisiana, New York, Indiana and California. This isn't much when we routinely talk in trillions, but clearly that money has not been wasted or otherwise sunk down Wall Street's black hole. So why no cheering as the cash comes back?

My answer: The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell 'em what to do. Control. Direct. Command.

His misgivings are a little premature, but given recent actions of Congress, they do have proper foundation.