The economic crisis of 2008
The economic crisis of 2008 was preceded by an economic boom in commodity goods and real estate markets. The price of oil has risen to some of its highest price ever and there was a real estate bubble in many countries in the few years preceding 2008 and during the early part of 2008. These, together with a rise in inflation have been cited as the economic imbalances that preceded the 2008 economic crisis.
The real cause of the 2008 economic crisis has been difficult to pin point. The high amount of debt in the United States economy is claimed to have been one of the cause of the economic crisis (Spence & Leipziger2010) (p.367). High default rates of mortgages from as early as 2006 were contributing factors to the eventual collapse of the real estate market in 2008.
The high level of deregulation existing in the real estate and financial markets prior to the economic crisis in 2008 also played a part in the cause of the 2008 economic crisis. This deregulation allowed financial institutions and blue chip companies to form new types of securities which they used to accumulate high amounts of debt. This high levels of debt led to the eventual collapse of such securities and the collapse of a type of derivative called the mortgage backed security caused the collapse of the real estate market and triggered the collapse of many financial institutions.
There was easy availability of credit prior to the 2008 economic crisis. This allowed the financial system to lend at low rates, leading to a growth in the real estate and financial sectors of the economy whose sustainability was not impossible in the long run (Spence & Leipziger 2010) (p.370).When the economy reached a point at which it could no longer sustain the boom resulting from easy availability in credit, collapse of real estate and financial markets occurred precipitating the economic crisis.
Following the economic crisis of 2008, the federal government put in place measures to ensure strict regulation of the financial sector (Spence & Leipziger2010) (p. 388). The appreciation that deregulation of the financial sector was one of the major reasons for the economic crisis allowed the federal government to institute regulations that control lending in by financial and investment firms. Proper vetting in credit provision was tightened to prevent further negative effects of unsustainable economic boom in the economy.
The economic crisis led to high levels of unemployment which persist up to date. Collapse of major companies led to massive lay offs and cost cutting measures involving retrenchment of employees were instituted by the firms that managed to weather the crisis. This massive unemployment rates have affected the American economy negatively, with a recorded reduction in the gross domestic product in the two years following 2008 and a substantial decline in capital investment.
The federal government, as a result of the economic crisis, was forced to develop bail out programs for the firms most affected by the collapse. This was in an attempt to prevent further negative effects of unemployment resulting from collapsing firms. These bail-out programs came with strict regulation on the operation of the firms that received government assistance, one of them being the regulation of executive pay in companies that applied for financial assistance by the government.
Government ideas for limiting executive pay
The federal government has proposed and instituted measures that seek to limit the amounts of executive pay (Berger & Berger 2008) (p.370). This has come as result of very high levels of pay for executives of companies which suffered from high levels of debt during the crisis and which were not making any profits. These regulations apply to those firms that benefitted from government financial assistance to avoid bankruptcy.
Regulations require the disclosure of executive pay (Webel 2010) (p. 19). In the United States, salaries and other bonuses meant as executive remuneration must be made known to stockholders so that they decide whether they are too high compared to the performance of a firm. This is a government regulation meant to limit the level of executive pay.
The government proposes introducing debt instruments of firms as part of executive compensation instead of using only equity stock as the preferred bonus option (Berger & Berger 2008) (p.3). This is meant to ensure that executives carry part of the debt of their companies. This is a limit to executive pay since debt instruments reduce the amount payable to executives in cash and equity compensation.
Regulations exist to limit the severance compensation to executives who are forced to leave a firm due to mergers or takeovers (Berger & Berger 2008) (p.379). This is meant to ensure that executives do not engage in activities that may promote conditions for such mergers and takeovers. Involvement in risky investment schemes that may financially hurt the firm as a result of executives’ actions are reduced by limiting the amount of severance compensation to executives.
A regulation exists that requires that all compensation to executives in terms of equity to be approved by shareholders who vote whether to accept or reject any proposed equity compensation plan (Berger & Berger 2008) (p.390). This acts to limit the level of compensation to executives. The Securities and Exchange Commission requires that companies submit explanations on how they determine the level of executive pay. This is posted in their website and enables investors make decisions on whether a company’s payment to its executives corresponds to performance. This limits executive pay because companies need to project a positive image to potential investors and high executive pays do not aid to portray such.
Berger, A., & Berger, D. (2008). The Compensation Handbook. New York, NY: McGraw-Hill Professional. (Pages 365-397)
Spence, M., & Leipziger, D. (2010). Globalization and Growth Implications for a Post-crisis World. Portland, OH: World Bank publishing. (pages 35-37, 47-68)
Webel, B. (2010). Financial Regulatory Reform and the 11th Congress. Congress Research Service. Washington, DC: Diane Publishing. (page 19)