Okay, enough hand-wringing over the half-million dollar salary cap...

[jducoeur]

Recent weeks have seen all sorts of panic about the Obama administration's cap of $500,000 per year in salary for the top executives at banks that get rescued by the TARP program. The rationale for the hand-wringing is that these banks are so *terribly* complicated that nobody with the skills necessary to save them would possibly work for so little money.

Enough. This is nonsense, and counter-productive nonsense at that. People are either being careless about the details, or (in best FOX News fashion) deliberately obscuring them.

Let's get it straight: the salary cap isn't a punishment for the greedy, it's incentive. Why do I say that? Because of the other half of the deal: there is no limit to the amount of "restricted stock" that these CEOs can receive. The restriction here isn't trivial: stock that the CEOs receive can't be redeemed until the banks are turned around enough to pay back the TARP money, with interest. But it can be a *lot* of stock.

So if you're a smart, entrepreneurial CEO with a good plan -- the sort of person needed to rescue these banks -- you are going to *run*, not walk, to one of these jobs. And the pay package you're going to ask for is $500,000 per year -- plus $20 million per year in that restricted stock. Now you have plenty of incentive to do your job efficiently, and to get the bank out of the semi-receivership it's now in. Which is, note, the point.

Yes, it's a bit of a gamble, but if you aren't prepared to make sensible high-stakes bets, you probably don't belong in high finance in the first place. And keep in mind that the bank's stock is probably in the toilet right now anyway, so that nominal $20 million you get promised today might well be worth $100 million after you clean up the mess, if you bring confidence back to the bank. Even by CEO standards, that's serious money. And it's money that is well-aligned with the stakeholders: keeping the bank afloat, getting the stock market behind it again, and paying back the taxpayers.

Mind, it's not perfect -- like all such interventions, it will introduce market distortions. For example, it gives the CEOs massive incentive to pay back the TARP funds, possibly at the cost of the bank's longer-term health. So it's no substitute for improved regulatory oversight. But it's a rather effective (and nicely subtle) measure to help make the new TARP funds under Obama, unlike those from Bush, more likely to actually get paid back in a decently timely fashion...

Comments

[goldsquare.livejournal.com]

Plus, of course, that sector does not have a lot of jobs.... so where will they go?

The answer is: overseas.

Why? Because the entire sector is short-term crazed.

[richenza.livejournal.com]

The real problem I've heard with salary caps is that it provides a disincentive to "company deciders" to participate in the program, at a time when rapid participation in the plan is crucial. We've already seen that these CEOs are happy to run their comapnies and the economy into the shitter to line their own pockets. There is a legitimate worry, that, like Japan in the 90's - when CEOs chose not to participate for reasons of pride and saving face until it was far too late - that American CEOs will chose not to participate until after it is too late to stem the bleeding.

Not that I disagree with the salary caps - but there is a legitimate concern with using them.

[jducoeur]

While I think that's a fair concern, I honestly think it's a pretty small one compared to the other factors. Like I said, the salary cap is really mostly illusion: the only people who are going to perceive themselves as hurt are the CEOs who *don't* think they're going to succeed in turning their companies around. And seriously -- if you aren't confident enough to take that gamble, you probably shouldn't be running the company, because you're not likely to succeed...

[eclecticmagpie.livejournal.com]

It ignores some very high-profile CEOs -- Steve Jobs, for example, who was unwilling to take more than a dollar a year to run Apple.

[jducoeur]

Yaas. Indeed, IIRC the CEO of Citi has declared that he'll be going on the dollar-a-year plan until things turn around. One suspects he understands the lay of this particular land, and how unimportant salary can be, quite well...

[laurion]

I agree. The proposal seems the perfect blend of stick and carrot designed to promote good leadership and punish bad.

[ilaine-dcmrn.livejournal.com]

And it sounds like banks are running, not walking, to give back the money (if they could) because it comes with too many accountability strings.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aP6xr9LsyklY&refer=home

[jducoeur]

Which has its plusses and minuses -- if Washington was under any illusions that they would have the banks to use as playthings for fixing the economy, they're going to be mostly disillusioned. But that's probably better in the long run...