Obama’s $500,000 Pay Cap for Overpaid Executives – Good Policy or Symbolism

President Barack Obama, along with newly appointed Treasury Secretary Timothy Geithner, called recent bonus payouts at firms receiving tax payer funded bailouts “shameful” and announced the government will require financial companies getting aid in the future to cap compensation of top officials at $500,000 a year. The compensation restrictions announced today are part of a wider White House plan to overhaul rules governing the remaining $350 billion in TARP money, free up credit markets and tighten regulation of financial markets.

“To restore our financial system, we’ve got to restore trust,” Obama said at the White House, “And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street. For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste, it’s a bad strategy, and I will not tolerate it as president.”

Not surprisingly the pay restrictions won support from both Democrats and Republicans in Congress, who say they’ve been getting angry calls and mail from constituents over bonuses paid to bankers being rescued by the government. Several lawmakers said they may pursue even greater restrictions and even lower limits for all senior management at bailed out companies.

Critics of limiting executive compensation say that all these restrictions will do is drive away top talent from troubled companies, at the worst time possible, to private sector or smaller companies that do not face these restrictions. It could also hinder a company’s ability to attract top-notch employees, and that would lead to a talent drain. Meredith Whitney, an analyst at Oppenheimer & Co., said on Bloomberg, “If you cap compensation, the best and the brightest are still going to figure out a way to make money, and it may not be on Wall Street.” JPMorgan Chase & Co. CEO Jamie Dimon said this week that it’s wrong for politicians to criticize Wall Street pay without differentiating between companies where compensation is commensurate with performance. “It’s unfair to talk about us as one,” Dimon, who was paid $1 million last year and didn’t accept a bonus, “Not every company was responsible.”

However, there are provisions under the administration’s plan that would allow additional compensation in the form of restricted stock that can’t be sold until taxpayers have been paid back with interest. The compensation cap may be waived for companies getting aid through what the administration terms “generally available capital access programs,” through full public disclosure and submission of a resolution to shareholders if requested. The rules also won’t be applied retroactively to companies that already have received aid such as Citigroup, Fannie Mae and American International Group (AIG). However, the limits would be applied if those companies seek a fresh round of assistance.

The administration is also imposing conditions that it says would force companies to disclose (via a public website) more about expenses such as corporate jets, office renovations, and entertainment and holiday parties. White House press secretary Robert Gibbs said such “‘name and shame’ provisions” would have as much impact as regulations on correcting corporate behavior.

Do you think the pay and bonus restrictions will have any affect or is just symbolism so that our Politicians look like they are doing something?

For most people $500,000 is a lot of money and more than 10 times the national average wage. Yet it is peanuts by CEO standards, especially those at Wall Street who were making millions in salaries and bonuses. The combined bonus of Wall Street investment bankers in the “good” years was more than the GDP of many small countries. As Wall Street got more greedy, Americans and the Government turned a blind eye to the excess since everyone seemed to be benefiting from rising stock markets, low interest rates and cheap mortgages.

But times have changed and the financial fairytale is over. We now live in a new financial world now where government bailouts and regulation are part of the norm as opposed to the exception. So rather than complain about their lower salaries and bonuses, company executives and senior management should be grateful that they have a job. The good times will eventually return and Wall Street will once again be lined with silver spoons and golden handshakes. In the meantime it will be good for those overpaid bankers to learn some humility.

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