A Catholic Thought on the Bailout Power Grab

by Ronald Rychlak - April 6, 2009

Reprinted with permission.

The Grayson-Himes Pay for Performance Act of 2009 is ostensibly designed to prevent corporations that receive bailout money from wasting it on undeserved bonuses and executive pay. Already passed (along party lines) by the House Financial Services Committee, this law would make it illegal to award executives with "unreasonable or excessive" compensation, and it specifies that bonuses must be tied to good performance.

One can understand the populist impulse behind this proposal. We do not want to waste governmental bailout assets, and no well-operated business would pay "unreasonable or excessive compensation" or offer bonuses for poor performance. So what's the problem?

The problem is that someone has to determine what is "unreasonable or excessive." Normally, American businesses decide issues like that for themselves. The Pay for Performance Act, however, puts that decision in the hands of Treasury Secretary Timothy Geithner and his staff. Moreover, the measure is not limited just to those firms that received the largest sums of money, or even to the top executives at various companies. It applies to all employees of all companies that took any bailout money, unless and until the company has paid back the government. Additionally, the law applies not only to future payments but even to existing contracts at those institutions that have already received funds.

In other words, workers under union contracts or those who qualify for bonuses or commission payments based on performance might see their contracts amended. The bill gives the Secretary of the Treasury the authority to decide what pay is "unreasonable" or "excessive," and it directs the Treasury Department to come up with a method to evaluate "the performance of the individual executive or employee to whom the payment relates." This, of course, could drive the best executives and employees from the failing institutions to their more successful competitors, virtually assuring the failure of the bailed-out businesses (and their consequent inability to payback the taxpayers).

This legislation transfers power to federal officials who themselves are largely responsible for the situation we are in. Private-sector greed and unjustified confidence that the good times would never end certainly played their parts in the economic meltdown. The private sector was, however, largely reacting to the environment created by the government. Loose money policies and unrealistic mandates to provide mortgages to unqualified borrowers encouraged private actors to behave as they did. Sensible policies – like rewarding executives with options that increased in value as the company prospered – evolved into a climate in which top executives expected huge salaries and bonuses due in significant part to these governmental policies. Is there any reason to think that legislators will establish better policies in the future?

Last fall, the government's efforts to keep failing financial institutions afloat did not require them to change how they operated in order to qualify for bailout money. When companies continued doing what they had always done (like paying large bonuses to top executives), politicians only got what they should have expected. Had they wanted the companies to change their operating procedures, they should have let the companies use the standard law that has long been available to companies in this situation: chapter 11 bankruptcy. Instead, Congress rushed through massive legislation without allotting time to carefully consider its consequences.

Now we are in a situation where an unprecedented centralization of power is being contemplated. With each new economic crisis (insurance, banks, health care, automobiles, etc.), the federal government seems poised to take more control and authority over the private sector. This could lead to a national economy that looks very different from what we have always known.

The Catholic Church does not purport to have economic or political solutions to every social problem that might arise, but it does have principles to which we can look for guidance. One of them is the principle of subsidiarity, which tells us that issues are best addressed by those who are closest to them. At the very least, this principle suggests that the federal government should not try to set salaries or evaluate the performance of individual workers in the private sector.

The Grayson-Himes Act is a step in the wrong direction. Fortunately, it seems less like a true proposal and more like a way for Democratic politicians to beat Republicans about the head in the next election cycle. Representative Grayson has already argued: "This bill will show which Republicans are so much on the take from the financial service industry that they're willing to actually bless compensation that has no bearing on performance and is excessive and unreasonable."

More troubling is that this bill is just one piece in a larger movement. President Obama has already hinted that the federal government should play a bigger role in setting salaries for all corporations, regardless of bailout money. That seems to be the direction that his administration is heading, and that should concern everyone.

Ronald J. Rychlak is the associate dean and MDLA Professor of Law at the University of Mississippi School of Law. He is the author of Hitler, the War, and the Pope (2000) and Righteous Gentiles (2005).