Anxieties Grow Over Looming Salary Caps

Obama's pay czar, Kenneth Feinberg, is moving aggressively to tie compensation to long-term performance, to some concern

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The threat of putting a ceiling on the salaries of employees at bailed-out firms has become more palatable as it has seemed more inevitable. In September, Citigroup CEO Vikram Pandit admitted that paying one of the company's top energy traders $100 million was a tad excessive, and "ardent libertarian" Evan Newmark gave his blessing to putting pay caps on Wall Street.

But now that administration "pay czar" Kenneth Feinberg is getting serious about limiting cash compensation for executives at seven bailed-out firms and tying pay to long-term stock performance, pundits are less enthused. Why? The main complaint is that the government is shooting itself (and, in turn, taxpayers) in the foot by pushing the best talent out the door. But the silver lining, at least according to one pundit, is that the companies will only be left with employees who are invested in their long-term prosperity.

  • Giving the Best People Away to Hedge Funds and Private Companies, says Douglas A. McIntyre at Daily Finance. "Feinferg is taking a big risk. Some of Wall Street's best companies, such as Goldman Sachs (GS) and Morgan Stanley (MS), have much more latitude in what they can pay key talent. Hedge funds and other private institutions have no restrictions at all, so luring the best people from companies facing the restrictions will be fairly easy. Feinberg's philosophy about long-term compensation may be right, but the short-term consequences are sure to damage the firms over which has has power." In 24/7 Wall Street, McIntyre raised another concern: that Feinberg was stepping on the toes of the bank boards.
  • But Ensures That Executives Are in It for the Long Haul, suggests Noam Scheiber at The New Republic. "This sounds like exactly the right idea: Don't fight the overall level of compensation--even if the government is heavily invested in these firms, they still have to compete for talent in a mostly-free global market. But, for a given level of compensation, make sure executives' incentives are aligned with those of shareholders, creditors, and other stakeholders (like the government, which is implicitly on the hook for too-big-too-fail companies)...employees who'd be deterred by rules against touching stocking for five years probably aren't people you want working for you anyway. So this performs a nice screening function in addition to correctly aligning incentives."
  • Will Cause Firms to Repay Loans Sooner Than They're Able, writes Daniel Indiviglio at the Atlantic. "You do whatever you possibly can to repay the government, even if that means weakening your capital base and putting the firm's stability in jeopardy. Because there's only thing worse right now than a weak capital base: virtually all of your top bankers leaving the firm....If we are on the road to recovery, then the last thing we need is a mini-financial crisis with the collapse of several financial titans that felt forced to repay the government before they were really ready." In a separate post, Indiviglio echoed the concern that bankers, who have built their lives around a certain income, would leave firms that cut their salaries.
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