This is way overdue. Good for Obama and his team for doing the right thing:
The Obama administration is expected to impose a cap of $500,000 for top executives at companies that receive large amounts of bailout money, according to people familiar with the plan.
President Obama and Treasury Secretary Timothy F. Geithner will announce the executive compensation plan on Wednesday at 11 a.m.
Executives would also be prohibited from receiving any bonuses above their base pay, except for normal stock dividends.
The new rules would be far tougher than any restrictions imposed during the Bush administration, and they could force executives in the months ahead to accept deep reductions in their current pay. The proposed cap comes amid rising public fury about huge pay packages for executives at financial companies being propped up by federal tax dollars.
Executives at companies that have already received money from Treasury Department would not have to make any changes. But analysts and administration officials are bracing for a huge wave of new losses, largely because of the deepening recession, and many companies that have already been to the trough may well be coming back.
As Devilstower pointed out last night, Missouri Democratic Senator Claire McCaskill has been the force behind the proposal. Her plan was to cap executive salaries for companies getting TARP money at $400,000 per year; she pegged it to the salary of the President of the United States.
Obama was a little more generous. But even though Obama's rule will allow executives to make up to $100,000 more than him, some defenders of the corporate elite apparently think that's like communism or something:
"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."
Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits will make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms.
What ever will those executives do?
Look, here's the situation: Bush may have wanted to bail out his backers in the financial services industry, and that may have driven his support for the $700 billion bailout. But most people who supported it did it in spite of the irresponsible CEO's who helped create the collapse of the credit markets. Most people who supported the bailout did so because it was too important to the entire economy to keep credit from completely drying up. It was a case of how people often refer to what FDR did during the Depression: it was saving capitalism from the capitalists.
But the guys (and they're almost all guys) who blew their companies' money on obscure "financial products" that were mostly just bets on bets on bets, they don't deserve any great rewards from the taxpayers. It's not in the public interest to make sure they continue to get over over 350 times the pay of the average American worker.
No, the public good is served by getting competent managers in charge of these companies, and theoretically making sure they're paid something fair and at least remotely close to market value so the companies aren't left in the hands of incompetent managers.
But, that already happened, at a much higher rate of compensation. Remember, it was the guys making $20 million and more per year who created this mess.
So, what's required to get competent managers in these positions? Remember that McCaskill pegged her maximum CEO salary to the salary of the President of the United States. Are we to believe that a CEO making $20 million per year is 50 times more impressive and talented than the President of the United States? (OK, granted, the answer to that question is different today than it was three weeks ago.) And are we to believe that the only reason anyone does a job, in particular these high profile, very powerful jobs, is for the money?
The idea that money is the only reason anyone would take over the reins of Citi or Wells Fargo or General Motors is, of course, crazy. Sure, there are some who only do those jobs for the money. But that's not who we need right now. We need people who will do the jobs because they care about the companies, are up for the challenge, and realize that if they can do a good job now, that they'll make a ton of money later on.
The people who got those financial services companies in trouble were for the most part people who didn't understand risk as well as you should expect of people in those positions—they allowed their companies to be wagered over obscure credit default swaps and derivatives that the CEO's themselves often didn't understand—and who didn't take on any significant personal risk. They got paid exorbitant salaries, even more extravagant benefits and stock options, and then when their companies got in trouble, they were bailed out by us, the taxpayers. And then they still got bonuses.
They privatized success—good things were supposedly because the Masters of the Universe were brilliant, so therefore they should get tons of money—and they socialized failure—the problems were "systemic," in spite of the brilliance of the Masters of the Universe, and because it supposedly wasn't their fault, the execs of the failed financial services companies should still get tons of money. Or so they (and the boards of these companies) thought.
The CEO's have reaped much of the rewards, but have been exposed to little or none of the risk. It's time for that to change.
What we need now are heads of those corporations who will personally take on the risk that comes with a high profile job where your salary will be, as long as you're being bailed out by the American taxpayer, capped at "only" $500,000 per year. We need people like that so that they understand risk, both organizationally and personally, that they're exposed to the the level of personal risk comparable to the risk to which they expose their companies. Furthermore, just as the taxpayers are investing in these companies and want them to succeed for the long-term benefits to the country, the CEO's of these distressed companies should be making decisions about the long-term health of the company, the long-term interests of the investors in the company—the taxpayers—and their own long-term success, not a single year payout.
Congratulations to the Obama administration for fixing one of the glaring shortcomings of the original TARP program. Keep it up.