If you buy a cheap cell phone, it’ll probably break. If you buy cheap food, it’s probably unhealthy. If you hire a cheap Chief Executive Officer (CEO), it stands to reason that your company will fail. Imposing salary caps on executives encourages talented directors and executives to leave the industry, discourages entrepreneurship and undermines the American capitalist economy.

There is a small pool of individuals with the competence and will to run an international corporate business. Running a company is a stressful undertaking as well as a personal risk. When people take these risks and are successful, they should enjoy a high reward. Not paying executives fairly for their work would drive talented executives into another industry altogether. Salary caps would result in less competent people willing to work for less, giving them a larger stake in the American economy.

A common misconception is that CEOs and executives determine their own pay. On the contrary, the board of directors determines the salary. Most major companies are public companies, and public companies are all required to report how much they paid the five highest-earning employees in annual proxy reports.

During the banking crisis earlier this year when a few major companies were bailed out by the government, those companies had a CEO salary cap of $500,000 instituted upon them. Taxpayer money shouldn’t be spent on lavish bonuses and payments, but capping these companies is counterproductive. Companies receiving the most bailout money need the best leadership and direction. The salary cap makes these tough jobs far less appealing to qualified potential CEOs and directors, when they could take a less risky job for five times that pay. For example, Bank of America has repaid its federal stimulus money because of the strings attached–most notably the salary cap. They were having difficulty finding a replacement for CEO Ken Lewis, who was planning on retiring at the end of Dec. because no qualified person was willing to take the relatively low-paying job.

In early November, the Indian government abolished a law that limited the total pay of all executives and directors to 11 percent of the company’s total revenue for the year. Instead, shareholders and the board of directors decide the pay and dole it out based on how well the executives lead the company. This ensures that the people running the company are held personally accountable if there is a downhill slide in the company, and rewards them for leading the company in a positive direction. It compensates executives according to their performance, and doesn’t discourage entrepreneurship the way salary caps do.

If the government insists on capping something in the business industry, it makes the most sense to cap severance packages, a payment an employee receives upon leaving a company. Most of the time, executives leave because they were doing a poor job, and lavish severance packages essentially reward them for leading their respective companies in the wrong direction. Home Depot CEO Bob Nardelli was paid $210 million upon his departure, and Disney CEO Michael Ovitz was paid $140 million after only 14 months on the job. A reasonable solution would be to cap these disproportionate severance packages to a year’s salary. This is enough money to ensure their lifestyle can be maintained for a while, but isn’t an extremely large pay.

Capping executives’ salaries is essentially an oversimplified “one size fits all” solution to a complex industry’s pay scale. There are so many sizes and types of companies that would be affected by a salary cap: public and private companies, local companies and companies that operate on an international scale. A CEO of a small, private company that operates on an international scale shouldn’t be subject to the same pay scale as a public company that operates on a national scale.

Executive salaries shouldn’t be absurdly high, but they need to adequately reflect how the company is faring and the enormity of the job. It’s the company’s responsibility to strike a balance using the salary and perks to attain and retain top executives–not the government’s.