Further to Julian Adorney on the Maximum Wage

It is worth recalling that Congress during the first Clinton administration passed legislation limiting cash compensation for CEO’s of public companies to $1 million. The result was that compensation swung to stock options. This in turn encouraged CEO’s to borrow in order to buy in company stock, which helped stoke the subsequent stock market bubble.

When the accounting profession then sought to rein in the use of options, which at the time did not have to be treated as corporate expenses, several congressmen and senators, Joe Liberman in particular, publicly threatened them with legislation that would take away their authority over options.

The actions of the Fed were far more important in creating the stock market bubble that subsequently popped in 2000, but Congress certainly made it worse with its unwise legislative interference with executive compensation. This was just one more example of government fixing, manipulating, or nudging prices that should be set by the market, that is, by consumers.

Comments

  1. Great point, Hunter! Government interference produces unintended consequences, and now the same people who advocated the failed first policy are fighting for more government interference.

    I remember seeing a graph of CEO pay as a ratio median worker pay: 210:1, 50:1, etc. What I noticed is that the ratio spiked in the late 90s, right around the time that Congress passed legislation requiring that CEOs publicly disclose the ratio. Congress hoped public disclosure would shame high-earning CEOs, but it actually just made CEOs more competitive: the CEO of Home Depot might say, “Look! The CEO of Lowe’s is getting 200x his median worker pay, and I’m only getting 150x. I need a raise to 210x”, prompting the CEO of Lowe’s to then re-one-up the CEO of Home Depot, ad nauseum. Congress’ stated intent absolutely backfired and made CEO pay higher.

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