October 16, 2008
The bailout plan unveiled Tuesday of this week aims to cap executive pay at $500,000. Compensation experts however believe that the plan does not go far enough. While an unstable economy will help place a natural cap on salaries for now, in the long term it is considered unlikely that salary levels will in fact be reined in.
Banks will simply pay higher taxes and will find other creative ways of paying their executives as they see fit. Some say there could even be a sudden surge in compensation as soon as the government program ends, in a few years, leading to eye-popping numbers down the road, writes Reed Abelson of the New York Times.
History offers examples of the futility of a salary cap: previously when Congress passed legislation limiting the tax deductibility of cash salaries to $1 million, this was countered by the far heavier use of stock options as compensation total payouts were even higher.
Experts suggest that banks will largely ignore the $500,000 cap, as their top execs will otherwise leave for more competitive salaries at unregulated institutions. Instead, it is likely that they will choose to face tax penalties.
Comments | 8 Total
October 16, 2008 at 10:09am by Rachel King
Murphy is right: despite the economic turmoil we're in and how much taxpayers are upset at the banks, no banking executive is going to settle for $500,000. This is still a free market. As Rep. Barney Frank said, it is really going to depend on how the Treasury implements and enforces this rule. (http://www.nytimes.com/2008/10/15/business/15pay.html?em) If Congress and the Treasury take a strong stance and stand up to the banks, only then maybe can this really happen.
October 16, 2008 at 11:28am by Jack McCart
Capping salaries on anything other than company performance seems very un-American. I'd rather see some type of pay based on after-tax profit or some other measurement that doesn't encourage artificially inflating value. Although I agree that some CEO pay has gone overboard, it doesn'n see so bad when we compare how we reward sports/entertainment stars and the value (or lack) they add to our culture.
October 16, 2008 at 11:37am by Brian Flores
The key isn't pay; it's the total compensation! The overhaul of the tax code that limited CEO pay deductibility to $1 million caused executive compensation packages to bulge with options, perquisites, and creative forms of deferred compensation. Isn't Secretary Paulson still receiving deferred comp from Goldman?
October 16, 2008 at 11:46am by Mel Blitzer
If you believe in free market capitalism (regulated or not)as an economic engine, compensation of leaders of corporations really is beside the point. The free market for talented and effective labor will always create pressure for higher and higher rewards for those who succeed. This is a fundamental principle on which the American constitution is based and I would hold that this basic belief in the right to pursue happiness is not something that the average America would want the government to regulate with a cap.
The main issue here is that the executives in question, who have led their organizations into such financial straits and created an economic crisis of monstrous proportions appear to be rewarded for their failed financial brinkmanship. Rewards for executives in corporate America in many cases have been de-linked from accomplishment and even when linked to accomplishment appear to be far in excess of a reasonable return to the recipient executive.
Many executives, viewed from inside and outside the corporations, appear to operate effectively as mini-monarchs, free from reasonable governance, and paid exorbitant compensation as a divine right rather than for getting results.
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Mel Blitzer
October 16, 2008 at 1:24pm by Mark Clark
Is this the same Rep. Barnie Franks whose lover was an executive with Fannie Mae? The same Fannie Mae that Franks was responsible to oversee and regulate as a member of the House Banking Committee? http://www.foxnews.com/story/0,2933,432501,00.html I guess if there was anyone who understands what happens when you fail to impliment reulations properly it would be Barnie Franks--all he has to do is look in the mirror.
October 16, 2008 at 6:17pm by Miriam Cohen
I agree that the banks will most certainly find a way to side step the cap, but suspect they will find ways to do so that don't incur tax penalties. There are a myriad of perks that can be offered and passed off as non-financial compensation.
October 16, 2008 at 9:32pm by Lee Solon
Banks created the problem, banks need to be bailed out.
It is inconcievable that the men who created or consented to the whole sub-prime debacle be penalised. If you can call a $500,000 salary a penalty! Get real America, you caused the problems, now face up to them.
October 17, 2008 at 5:46pm by Brian Flores
@Jack, I share your view that the pay packages of superstar athletes and movie & musical stars is another example of Nero warming up his fiddle, but the truth is that they generate positive revenue. The Yankees are one of the richest teams in pro sports because they have the whole shebang - the revenue from merchandising, the broadcast network, et al. Next time we think about going to a sporting event, perhaps we should make a donation to spur scientific innovation instead.
@Mel, sorry but compensation of leaders is NOT besides the point. If corporate boards were truly independent of the CEO's they were compensating, we could make the argument that regulating executive pay was un-American. When you have what is effectively collusion between these clubby country club sets of execs and the boards that ostensibly provide oversight and demand accountability, then runaway executive compensation isn't American - it's an oligarchy at its worst.