Executive Pay Limits in the Financial Bailout are Dead Letter

First, let me just say what a sad reflection on the Bush Administration and congressional Republicans it is that I have to specify which bailout I’m talking about. Okay?

The real story is that the executive pay limits which were part of the financial bailout turned out to be worthless:

Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules.

But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.

Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future.

This isn’t the tragedy that Democrats will make it out to be. The bank bailout flopped because Treasury was just making a wild-assed guess as to what to do. The executive compensation limit was the type of populist penalty that make Democrats (and many Republicans) feel good, but never was going to be the crucial element of the bailout that pushed the accounting back into the black. It was simply a form of civil punishment on executives (many of whom weren’t involved in riding these banks into the ground).

More importantly, these companies are never going to fix themselves without real, fully-paid executives. There’s just too much personal liability attached to helming one of these companies. If you want to attract real talent, you have to pay for real talent. This is patent, but comes up against an obvious response: we already paid for “real talent” and look where it got us.

Fair enough, but think of it like this. We paid for high-quality executives and they turned out to be not so high-quality. What makes you think that if we pay executives a middling salary we’ll get any more than middling-quality work from them?

~ by Gabriel Malor on December 15, 2008.

2 Responses to “Executive Pay Limits in the Financial Bailout are Dead Letter”

  1. If we pay executives a middling salary, maybe these chiefs will work because they love being great leaders; not just for the money. When you remove the lure of money, often only those executives who are truly dedicated to ethics, hard work and a job well-done step forward.

  2. No executive who takes TARP money should make more than the President’s salary.

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