Citi Will Lose the Compensation Game

About a month ago, I wrote about why it's bad that government bonus caps and public perception have led to banks deciding to shift their compensation models to bigger salaries and smaller bonuses. The New York Times reports today that Citigroup, arguably the most troubled of the big banks, will raise workers' salaries by as much as 50%. Obviously, a raise like this might will cause some outrage. The Times article implies there's little the government can do. I'm not sure that's true.

Since the government will probably end up owning approximately 34% of Citi, their power only extends as far as legislation allows. That's over the 100 top executives. The responsibility of controlling compensation belongs to Kenneth R. Feinberg who bears the Orwellian-sounding title of "special master for compensation."

The Times explains:

Kenneth R. Feinberg, the administration's new "pay czar," has the authority to set compensation for only the top 100 employees at troubled companies. The rest -- which at Citigroup, means fewer than 300,000 people -- can be paid as executives see fit, provided any increase does not rank them among the 100 most highly paid workers.

The last part of that blurb interests me. Let's say the pay czar says the top 100 paid employees cannot early more than $350,000. Then doesn't that mean no one else can earn more than that too? As the article explains, if they did, then they would enter the top 100 and fall under the control of the compensation restraints. So I'm a little unclear on why it matters that the pay czar can only set compensation for the first 100 -- that means he can effectively set a pay cap for the entire firm.

The only way around this would be if the Times got it wrong, and those top 100 employees are just a list of unfortunate souls who Citi considers their top executives and says the pay czar can control. That seems unlikely, however, because then Citi could just provide their top 10 executives and list their mailroom employees as the next 90.

Since this latter possibility seems remote, I think the government has plenty of control over compensation. Even with 50% increases in salary, if the mighty czar of compensation shakes his head in disapproval, then everyone makes less. It's irrelevant how many people he has control over if he sets their compensation limits low enough. I guess then the question becomes: Will he?