The stupid bailout pay caps

I’ve been lax in blogging about the bailout because there’s so much stupidity I haven't been sure where to begin. Well, now I have an idea where to begin – the President’s plan to curb pay for recipients of “exceptional assistance” to less than $500,000/year other than restricted stock, with an effective hurdle set at the payout of the debt.

The proposal will also include shareholders "say on pay" for senior executive compensation, which I’ve described as “quack corporate governance,” but which our President nevertheless sponsored in the Senate.

According to the WSJ:

the president intends for these standards to mark the start of a long-term effort to institute a "sensible framework" for executive compensation that promotes sound risk management and long-term growth while preventing future financial crises. Possible steps for the future include requiring compensation committees on all public financial institutions to review and disclose strategies for aligning compensation with sound risk-management.

Note that this proposal applies not just to the executives who messed up, but to new hires that might lift the firms out of their morass. It therefore not only doesn’t focus on the bad, but helps free them from competition in the executive talent market.

This is so blindingly stupid that it would barely deserve comment but for the fact that it threatens to help further impede a desperately needed recovery. Here's John Carney:

[W]e'll find ourselves in a strange world in which competition for talent is severely limited. * * * [T]his would have the effect of allowing dead in the water firms to continue on without fear of losing their best performers. This, in turn, might actually encourage Wall Street to further misbehave. * * *

The exit of talented people is typically a signal of financial distress on Wall Street. * * * Once you max out compensation at five hundred grand, you'll find that this signal becomes useless.

Overall, this could hurt our economic recovery by limiting the rewards for making smart bets on the companies and sectors that will lead us into economic health. * * * Basically, we'll wind up creating a zombie version of Wall Street that will have little incentive to rebuild our economy.

Carney's skeptical that it will work because financial pros will find "work-arounds" for the limits.  But that won't eliminate the costs because the work-arounds will not necessarily be incentive equivalents.

But I do have one good thing to say about the proposal: it could hasten the flight of talent out of the traditional corporate firms that created the mess. Private equity may not be thriving now, but this bodes well for these firms’ ability to attract the best talent in the future, despite the risk.

Update:  Here's some of the proposal.  Though it's limited in scope to a few executives and companies, these are the executives and companies for which incentive pay is most important.  Plus, this could be a model for the future.

Comments

[MHodak]

People deride capitalism as a system of institutionalized greed. So we are replacing it with a system of institutionalized envy.

Best part: "Require Board of Directors’ Adoption of Company Policy Relating to Approval of Luxury Expenditures"

It doesn't get more 'Atlas Shrugged' than that.

[Brett]

You effectively make the point that a blanket prospective limit of
$500k is a bad idea, but this doesn't appear to be what the Treasury's plan is. Rather it seems that Obama has created a very populist headline with what is in fact simply a requirement that payments above 500k be tied to performance (however, the link to overall firm performance for particular employees seems misplaced).

In particular: "...senior executive receiving such restricted stock will only be able to cash in either after the government has been repaid – including the contractual dividend payments that ensure taxpayers are compensated for the time value of their money – or after a specified period according to conditions that consider among other factors the degree a company has satisfied repayment obligations, protected taxpayer interests or met lending and stability standards."