Wednesday, February 4

Megan on executive pay caps

First:
Obama has unveiled a plan to limit executive compensation for banks taking government aid:
President Barack Obama will unveil a series of pay curbs on Wednesday, including a strict new limit on executive salaries for companies that receive "exceptional assistance."

The rules represent the White House's attempt to ensure that financial institutions receiving government money are held accountable for spending it responsibly, an administration official said.

Under the new rules, companies that receive "exceptional assistance" from taxpayers may not pay any top executive more than $500,000 a year, an administration official said. Any additional compensation would have to be in restricted stock that will not vest until taxpayers have been repaid, the official said.

A reader writes to ask whether this is a good idea. Won't it mean executives will leave these firms in droves?

Under ordinary circumstances, perhaps. But executives are already leaving these firms in droves, supervised by security guards who carefully watch them clean out their desks. The market for used investment bankers is, as they might say, extremely illiquid.

Under those circumstances, I think this is reasonable. And while I am not particularly offended by the size of investment banking paychecks--though why they persisted in an allegedly competitive market is still something of a mystery to me--I don't think the taxpayer ought to be funding Swiss skiing chalets and Palm Beach Mansions. Get a house in Scarsdale and take the train like everyone else. If they don't like it . . . well, there's precious little evidence that any of them are the sole indispensible genius who can save their firm from the economic crisis, now, is there?

More:
Regarding Obama's stimulus package:
"That is pretty draconian -- $500,000 is not a lot of money, particularly if there is no bonus," said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. "And you know these companies that are in trouble are not going to pay much of an annual dividend."
Yes, I often think to myself, "how could anyone live on $500,000 a year? It's like something in the middle ages. Except, you know, with granite countertops and private schools for the kids." But then I started doing volunteer work on the Upper East Side, and you wouldn't believe how cunning those people can be at making a dollar stretch--two for one deals at Nobu during Restaurant Week, discount Dior, making the drapes do for another season. Maybe figuring out how to live on such meagre returns will be valuable training for figuring out how to operate a financial services firm without regular infusions of taxpayer cash.

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