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Executive compensation and the role of government

What reaction, if any, should the government take regarding executive compensation? One example $3.6 billion in bonuses Merrill Lynch executives received shortly before the merger with Bank of America. This story has two sides - nothing in their contract prevented the distribution of the "earned" bonuses but the payment was rushed through before the merger. Also, bear in mind that this was after the U.S. Government stepped in and rescued the company to prevent it from going into bankruptcy. So these executives walked away with the "golden parachute" after tanking Merrill Lynch and forcing the government to spend billions to protect our economy.


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If we are looking at the capitalist model wherein government has no say in business and in market conditions, then technically the government should not be included in the issue of compensation at any level. However, with regard to the specifics of the case mentioned above, then the government not only has the right, but also probably the duty to be proactive in terms of being involved in ANY financial decision made due to the fact that they are spending tax dollars --- those dollars contributed by folks like you and me with hard earned effort.

Recognize that the market has a way of filtering the interests of business and the ways that any business operates. If we, as consumers, object to anything happening within any business entity, we can choose to take our business elsewhere. Theoretically this provides market oversight into the operations of any firm. Hence, if we think we are being over charged for a car, for a piece of furniture, for clothes, for a TV set, etc., we are free as an intelligent consumer to shop for a better deal. REMEMBER THAT AMERICANS ARE CONSIDERED TO BE SOME OF THE MOST INTELLIGENT AND DISCERNING CONSUMERS IN THE WORLD. We know our products, we know our ability to consume. We know the limits of our disposable income. So the majority will shop the best deal, leaving firms who are not savvy within the market place the possibility of failing to survive. That is the basis for the capitalist model.

Now we know that this model has been degraded over time in the sense that firms now use government contacts and influence peddling to gain growth oriented business --- to increase sales and market presence as a means to grow the business so that the top few within the corporation can meet goals which will pay off in the payout of significant incentives, including bonuses such as those mentioned above, and in stock options, and in golden parachutes, and interest free loans, and the like. As part of the capitalist model, these types of firms should ...

Solution Summary

A discussion of the role of government in determining executive compensation in private business.