Are There Any Limits on Executive Compensation?
Last updated October 18, 2023
Business executives are often among the most well paid individuals in our society. They have a lot of responsibility and they are experts in their field. However, business executives often do not have full ownership of their businesses. Instead, the businesses are owned by a variety of stockholders. Accordingly, the appropriate compensation for business executives is a topic that is often considered and hotly debated.
Generally, the law did not impose a limit on the compensation of business executives. Instead, executive compensation is a matter that is left to the private sector. Instead of legal and governmental involvement in determining the salaries, bonuses and stock options that were appropriate for individual executives, it was thought that individual companies should work out individual compensation agreements with executives. Companies could best determine the value of an executive’s skills and how much the company was willing to pay for that executive. As long as the executives acted in accordance with their fiduciary duties and in good faith then the agreements were generally outside of the court’s jurisdiction.
Regulation Without an Imposed Maximum Wage
While compensation is usually a matter that is left to the private sector, as described above, the government has attempted to put some regulation on executive compensation without setting a maximum wage limit. For example, public companies may be required to disclose the salaries, bonuses and other compensation received by their executives to their shareholders who may object to excessive compensation.
It is also possible to regulate maximum wages through taxes. The government could, for example, institute a tax plan that would create a high tax on incomes over a certain level. While this would not prevent an executive from receiving excessive compensation it might make excessive compensation less desirable and reduce compensation plans to levels that prevent the high tax rate. There are, of course, criticisms of such a tax plan in that it creates too much government interference with the free market and that it unfairly taxes the income of certain individuals.
The Bailout Exception
The general rule, that executive compensation is a matter for the private sector, is still applicable to the majority of business executives in the United States. However, in February 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 which introduced compensation limits on some of the high paid executives whose companies were receiving federal bailout money. Recipients of federal Troubled Assets Relief Program (TARP) money (also known as bailout money) must have appropriate standards for executive compensation. The U.S. Treasury Department will provide guidance on what will define appropriate standards. One standard, for example, may be to limit bonuses of the top executives in companies receiving TARP money to one third of their annual salary.
The Obama Administration is still debating whether additional regulations are needed on executive compensation in certain industries, such as the banking industry. It is, therefore, important to watch for any new laws or regulations regarding excessive compensation that may occur in the future.
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