What's Wrong With Cutting TARP Executive Pay

The White House will drastically cut pay for bailed out companies, but will it do any good?

This article is from the archive of our partner .

The White House is slashing executive compensation at the seven companies that most benefited from TARP bailouts: AIG, Bank of America, Citigroup, General Motors, GMAC, Chrysler Group and Chrysler Financial. Pay Czar Kenneth Feinberg is set to announce that top earners' total compensation will, on average, be cut in half, with the cash portion of salaries cut by 90%. The move, widely seen as motivated more by bailout politics than by pure economics, makes mostly symbolic cuts to a small number of high-profile executives. Will it protect the White House from populist outrage, be seen as an empty gesture, or actually worsen the situation as some warn? Feinberg could have a Goldilocks problem, with pundits seeing his actions as either too much or too little, but never "just right."

  • Cheap Excuse for Oversight  Econoblogger Yves Smith scoffs at the empty gesture. "Does this really mean anything? The press will noise it up as significant (and some outlets will no doubt finger wag at this 'interference') but the short answer is no," she writes. "Pay cuts falls well short of the oversight the government should be exercising [...] So this is an overdue, token measure to appease the public over the AIG retention bonuses that were also extended to clearly non-essential support staff, which is a clear tipoff that they were also extended to non-essential management."
  • Timed to Quash TARP Report  Politico's Morning Money suspects the pay-cut story was timed to supersede news of a negative report by TARP watchdog Neil Barofsky. "The leak of the plan to The New York Times' Stephen Labaton yesterday crushed the news of the extremely unflattering report by the TARP inspector general, Neil Barofsky. That report, which says the TARP undermines the credibility of the federal government and has made the 'too big to fail' problem much worse, would have otherwise been the lead story today."
  • Emphasis on Non-Cash Pay Dilutes Stocks  Harvard Law's Philip Greenspun thinks the move harms shareholders. "Uncle Scrooge is now saying that a bank executive and his golfing buddies on the Board can’t take home $100 million per year in cash anymore… he has to take $100 million in restricted stock instead. Sounds like an improvement, except to the shareholders whose interested in the public company will be diluted," he writes. "This latest attempt by the Feds to save shareholders seems likely only to defer their ruin."
  • Will Cut Execs Go Galt?  Econoblogger Alex Tabarrok warns this could discourage quality management from sticking with the troubled companies. "There is no way this will work as advertised. If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere.  Executives not directly affected by the pay cuts will also quitwhen they see their prospects for future salary gains have been cut. Chaos will be created at these firms as top people leave in droves. Will the administration then order people back to work?"
  • America's 9.5% Unemployed Rejoice  Gawker's John Cook channels populist happiness with the cuts. "This is all very exciting. The prospect of AIG executives getting by on just four times the nation's median household income is, well...satisfying," he writes. "On the other hand, these people always find ways to enrich themselves, and we have a feeling they'll continue to do so."
This article is from the archive of our partner The Wire.