Executive pay caps: “stealth nationalization” or “political grandstanding”?
President Barack Obama set a $500,000 annual pay cap on Wednesday for executives at companies getting taxpayer bailouts as part of a wider process to clamp down on excessive corporate pay.
The new rules would require banks and other companies that get government funds in the future to abide by the new cap going forward, with any additional compensation being limited to restricted stock that does not vest until government funds are paid back.
The following are comments from the market on the new plan. Add your own view in the comments section.
BRADY DOUGAN, CREDIT SUISSE CEO
“The industry will need to find a balance. There have clearly been excesses. Clearly, a lot of performance issues in 2008. Clearly, it is natural that compensation should be down a lot.
“But in the long run, we are still going to need to find a balance between making sure we have appropriate shareholder returns, making sure also that there are some incentives and some ability to build wealth for people who work in the business.
“Maybe a lot of the things that have happened and the direction they are going may help to achieve a better balance … between shareholder return and employee return in the business In the short run there is obviously a lot of noise about the compensation playing field. Actually, right now with regards to attracting employees it’s actually got much more to a point where people are just most interested in being part of a platform that they think is going to be successful and durable.
“I actually think it’s a move away from just: How much can I get paid here? How much can I get paid there? But actually people … being more interested in being part of a platform where they think they can build a career in the long term.”
LAUREN SMITH, ANALYST AT KEEFE, BRUYETTE & WOODS
“There is certainly a possibility” of talent flight from the big firms to the smaller investment banks if there are compensation limits.
“If those big firms that have taken TARP capital will have a noose around the neck with what they can pay people — and we can argue whether that was too much or not — I think we will see some of that.
“(But) you would go to a Lazard, Greenhill, Evercore because of the difference in the business model relative to the big firms and because of the cultural aspects. It’s a real cultural divide.”
MARK POERIO, PARTNER AT LAW FIRM PAUL HASTINGS
“I think it is going to warp the talent pool in many respects. If you have someone who was making well over $1 million, and now they are capped at $500,000, it is very conceivable that they are going to look to go to a company that is not subject to those limitations.
“It’s a very difficult situation because it is hard for the government to really step in and, on a broad basis, just legislate executive compensation … One size fits all has never worked. It is an understandable effort but it is a dangerous one.”
DAVID KOTOK, CHIEF INVESTMENT OFFICER AT CUMBERLAND
“This is pure political grandstanding. If the limit has bite, it will be counterproductive and the unintended consequences will hurt the US as skilled and bright senior managers make choices.
“If the limits have loopholes, they are a sham. Industrial policies fail. So will this one.”
U.S. HOUSE REPUBLICAN LEADER JOHN BOEHNER
“I think if anybody is looking to the taxpayer to help bail their company out, these kind of executive compensation limits are appropriate.”
Asked if $500,000 is the appropriate cap, he said: “I think somebody’s got to pick a number, the president has picked one, I applaud him for doing it.”
U.S. REP. MIKE PENCE, INDIANA REPUBLICAN
“I would say to Wall Street, be careful what you wish for. Maybe it is going to wake up American business — that there is a cost when you invite the 800 pound gorilla of government into your boardroom.”
Pence said he had opposed the banking bailout to begin with because he thought it was unfair for “taxpayers on Main Street to bail out bad decisions on Wall Street.”
But now that it is underway: “I have no problem with the salary caps. But it is an argument for why government should not be in the bailout business to begin with,” Pence told reporters. “Anyone who has been willing, as most of these institutions were, to support government-sponsored bailouts, ought to be willing now to go along with their new dance partner” and accept the salary caps.
MICHAEL HOLLAND, FOUNDER OF HOLLAND & CO, OVERSEES MORE THAN $4 BILLION, NEW YORK
“It’s the movement of the financial capital from New York to Washington. The recipients of the government money now have to face the chairman of their compensation committee — and that’s Barack Obama.
“The world has shifted. Washington is hitting the reset button for Wall Street’s compensations.
“I would say it’s at least a stealth nationalization. It’s occurring.”
PETER KENNY, MANAGING DIRECTOR AT KNIGHT EQUITY MARKETS IN JERSEY CITY, NEW JERSEY
“There are two ways you can look at it. Here’s the way that’s going to get people’s attention: Obama just threw a bucket of ice cold Washington D.C. water on the mentality of Wall Street by limiting executive pay. I’m agnostic about whether this is good or bad for the market. It’s just very sobering.
“There’s a lot of upward movement in the financials today because something is being addressed. There’s actual traction in terms of formulating and instituting a policy around TARP. That’s why you’re seeing not an enormous move to the upside, though it is in positive territory.
“The other thing you need to look at is sector rotation. Leadership is being aggressively sought after by investors and they’re finding it in place we haven’t looked in a while. One of those places is shipping, believe it or not, because it speaks to the global trade agenda. You’re seeing 12 consecutive days in the Baltic Dry Goods index, which we haven’t seen in well over a year. Things like that are early outliers of early stabilization of the market.”
JOHN O’BRIEN, SENIOR VICE PRESIDENT, MKM PARTNERS LLC, CLEVELAND
“That could really affect a lot of talent at some of these financial institutions. Personally, if I was a senior level executive and had a choice to go to public company or a private company, I would go private. There’s more pay for performance as opposed to pay for government level.
PETER MORICI, UNIVERSITY OF MARYLAND, ECONOMICS PROFESSOR
“There are loopholes in this: basically the stock options loophole and the fact that it only applies to the top executives. A lot of the problem this time around was with the people below the top, so this really doesn’t reform the compensation structure.”
JAMES MCGLYNN, PORTFOLIO MANAGER, SUMMIT INVESTMENT PARTNERS, CINCINNATI, OHIO
“We have about 359 institutions who have taken government money, and now because of that they’ll have to abide by these caps, and other draconian measures. So if you can get out of the TARP, you are going to do it as fast as possible, and that’s a good thing for everybody.
“It’s a good stick to have over my head … the longer I’m in this plan I’m not a private enterprise. Part of it has to be, can you replace it with capital? Some took capital so that banks like Citi don’t look weak, alone. If I’m in a corporate boardroom of one of those 359, my game plan would be how could I replace this in the capital market? And, is there a prepayment penalty?”
(Reporting by Lisa Jucca in Zurich; Vikram Subhedar in Bangalore; Susan Cornwell in Washington; and Martha Graybow, Phil Wahba, Ryan Vlastelica, Deepa Seetharaman, Al Yoon and Paritosh Bansal in New York))