Opinion

The Great Debate

Executive pay caps: “stealth nationalization” or “political grandstanding”?

By Reuters Staff
February 4, 2009

obama-geithner 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))

Comments
11 comments so far | RSS Comments RSS

The sub-prime fiasco has adversely effected the financial world, not just America, seriously. One of the main reasons was the greed of the decision makers at the top, who have now had to come down to earth. The disastrous consequences have had a terrible effect world-wide. If 359 senior executives have to reduce their remuneration from an average of 100 million each, and their failure has had to be paid for by the American taxpayer, I praise and thank Pesident Obama for his ‘stand’. Talent should not be compensated by millions of dollars. Current capitalism is profits for the directors’ and CEOs’ club, and losses have to be paid for, by the taxpayer. Disgraceful.

Posted by Maurice Lekamge | Report as abusive
 

The pay cap will drive the best talent from these institutions thus driving the stake through the heart of businesses that are already dead…

Posted by RFL | Report as abusive
 

Capping the ridiculous salaries of some CEOs will not drive out talent. Obviously the only talent the current heads had was how to increase their own wealth, so keeping them down to a few million a year, I think, is only fair.

And what does it matter if it drives a stake through the heart of a dead business? I’d prefer my money to be in the hands of humans, not vampires (which is a good metaphor for what those people did to the world’s finances).

Posted by Zack | Report as abusive
 

I think that companies receiving federal assistance should be subject to some restrictions on how they spend that money. Defense contractors are all subject to lots of restrictions on what is termed an “allowable cost” in performing work for the government and that includes a limitation on executive compensation.

Posted by Betty | Report as abusive
 

“I think that companies receiving federal assistance should be subject to some restrictions on how they spend that money.”

I agree – either federal receivership or the daily presence of a DCAA auditor – those folks can find fly s*** in the elephant’s a**.

Posted by RFL | Report as abusive
 

Dear Reuter – The Great Debate

We have to recognize the action proposed by President Obama for what it is – a short term fix.

A fix that say: your banks are in trouble. Your banks will NOT be around IF the taxpayers money is not mobilized (reluctantly by some who opposed this since this fly against the capitalism system and culture that America is well known for around the world!). You are NOT that much of a talent if you can run your banks into the ground while getting paid millions (Right?)!

The long term fix is personal integrity of the people who are talented and are in leadership position in America – public or private spheres.

President Obama and his team are fighting an extrenched culture in the banking industry. As we know it is not easy to change a culture, what more an entrenched one. e.g. many spoke for guns control whenever there were senseless killing by someone in the USA while nothing changed seriously! e.g. some have highlighted the obsesity crisis American is facing against we are still seeing up-size everthing! e.g. we have been talking about gas efficient cars for years and yet not many people want to trade the speedster gas guzzlers for an electric or hydrid cars.

There are endless examples how difficult it is to change a culture. A habit!

So, we need to get behind President Obama on this crusade. It is a start. It will be controversial. The more we debate about it, the better.

Once we can see clearly how important it is that ALL talented people who are in leadership position embrace personal integrity, they will NOT over-pay themselves (with a 3rd party oversight), they will NOT over-consume and over-eat so that they need that multi-million dollar compensation pacakge!

President Obama need more people to share the same idealism. The idealism that will change even an ‘entrenched culture’!

Best regards
LU Keehong Mr.

Posted by LU Keehong | Report as abusive
 

Although I am not for ANY bailout whatsoever, I believe that the CEO, CFO, COO\’s of the companies, (and the directors) that recieved TARP should have constraints. Sure there may be some who leave, but if they were doing their job in the first place their companies would not be in the shape they are in.
I believe all upper management should be let go in order to change the culture of a failing company.
Let\’s not forget as well that those CEO\’s are getting huge options tied to repayment and performance. If I were a CEO making several million a year, and had any integrity and sense of responsibility, I would waive my compensation completely just to set a new tone and example.
C\’mon this is not rocket science, greed is great for the economy, talent should be rewarded-obviosly not for poor performance as in the companies recieving TARP. Notice all the CEO\’s scrambling to find a way NOT to get it?
We need to get rid of the excess in spending, streamline operations, pay for performance, and NOT provide ridulous payouts for not performing, (golen parachutes).
I do think that states and local governments who recieve TARP should also be subject to the same constraints!

Posted by Angela Blanchard | Report as abusive
 

In publicly held companies the Board of Directors decides who is compensated and how they are compensated. The failure here is in unregulated securities and financial instruments that did not exist three years ago(CDS,MBS,CDO) which have masked rampant criminality, and a wholesale looting of the Treasury. Private equity and hedge funds were made up out of whole cloth to launder money and mask criminality from individuals and governments; in other words; they stole it. Capping pay from bailout recipients is a good PR move, it looks good;
but it is symbolic, and has the real time relevance of closing the barn door after a stampede.

Frankly, I don’t know what they are going to do. I think people really need to start thinking long term survival.

I tell my teens “Frugal is the new Black”

 

I believe that I am a little more radical that those who have posted so far.

Since the compensations for these top exec’s and board members are so far outside the common stockholders control, this corporate environment has created, in essence, a corporate aristocracy at the determent of the stock holders and the consumers. There is no one worth what these corporations are paying. It is my opinion that no top exec or board member should be compensated more that the President of the US. The Fact that some of these corporations exec’s took TARP money and then pain bonuses is outrageous and basically the corporate aristocracy is flipping the finger at all of us. Kind of like when the French aristocracy, during a famine and just before the revolution, in utter lack of concern for the plight of the starving people said “Let them eat cake.” The US corporate aristocracy shows a total lack of concern for the people of the US and outrageous arrogance in their actions and attitude toward the economic emergency effecting millions of Americans. What they are saying is even though our corporate greed was responsible for the current economic condition and loss of millions of jobs we expect, no demand that the US tax payer be obliged to maintain our current lifestyle. In my opinion, I believe these social leaches got off easy. In France the People rose up and executed the arrogant bastards.

Posted by B.Free | Report as abusive
 

One cannot understand the madness of our civilization, because we are so used to it. – Eckart Tolle

Posted by Joel | Report as abusive
 

If a company needs a government bail-out, I’d argue that the talent that may actually be deserving of 7 figure salaries and huge bonsues have either already left those companies or were never there to begin with.

Putting executive salary caps in place for companies who seek bail-outs is an excellent move as it will either inspire those on the cusp to sort out their own problems and avoid those salary caps by avoiding a bailout OR to accept a bail-out and with out accountability for past failures with an impetus to turn their companies around so they can pay back the bail out money as swiftly as possible and climb out from under the salary caps imposed upon them by the government.

 

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