Compensation Overkill

When calamity strikes, Americans tend to look for a villain. This is how we regulate our industries, keep our government honest, and even how we go to war. Unfortunately, it means that many policies forged in haste end up being repealed years later, when it's clear that they were the result of overreaction.

Today, we stand on the cusp of another mistake that could sink American industry in the midst of a recession. Congress is toying with the idea of placing artificial caps on executive compensation.

The AIG Backlash

The latest battle in this crusade began on Wall Street. Several years ago, a handful of people in the finance arm of AIG began engaging in risky behavior that led to heavy losses. To prevent the firm's ruin, the US government bailed out AIG with cash infusions exceeding $180 billion. And just as the media was primed to report on every dollar spent by the company, public disclosures revealed that AIG had given out more than $218 million in 2008 bonuses—a hefty sum by most standards, but hardly a dot on the balance sheet of the firm's otherwise staggering losses.

Nevertheless, the backlash was harsh. A Gallup poll showed that 85 percent of Americans were bothered or outraged by the bonuses. Chief Executive Edward Liddy, who took office after the firm's most egregious recklessness, was subjected to a grilling on Capitol Hill.

Now Americans are demanding regulation of executive compensation. However, the call for broad caps on what executives can earn, without regard for their performance, is not the solution. In fact, such a blunt tool would ultimately hurt American interests and leave us at greater risk.

"We cannot attract and retain the best and the brightest talent if employees believe their compensation is subject to continued and arbitrary adjustment by the US Treasury," Liddy wrote in a letter to Treasury Secretary Timothy Geithner earlier this year.