Why the CEO salary cap is a joke

[Frank Booth]

But the deeper I dug into the details, the more inadequate the cap seemed. By the time I'd finished, the plan was insulting, a paper cut delivered when Madame Defarge is demanding the guillotine. Here's why:

* The cap won't apply retroactively. If your bank has already received its $45 billion in taxpayer money, there's no cap on pay.

* The cap won't even apply to all banks that take taxpayer money in the future. A bank that takes billions in "normal" bailout money from TARP II could get around the cap by disclosing pay and by holding a nonbinding shareholder vote on the pay. (It's nonbinding, so why wouldn't a company that wanted to pay more hold the vote? Because they'd be too embarrassed to pay the higher salary if they lost the vote? These companies, embarrassed? Remember the Citigroup (C, news, msgs) $50 million jet?) Only if your bank took "exceptional" assistance from taxpayers in the future would the cap be mandatory. It's not clear how the proposal would separate "normal" from "exceptional" bailout billions, but however the term is defined, the cap clearly affects fewer companies than it seems.

* The cap doesn't apply to all compensation -- just to salaries. Banks could still give CEOs huge bonuses, but the bonuses would have to be in the form of restricted stock that couldn't be sold until after the company had repaid taxpayers.

* And finally, and this is perhaps the most troubling, the cap, if finally triggered, would apply only to the top 25 or so executives at any bank. In other words, some Wall Street rocket scientist in charge of slicing and dicing subprime mortgages could make $5 million as long as he or she was far enough down the corporate ladder. Makes a lot of sense, right?

.................

But by and large, the folks who were neck-deep in the previous round are still in charge. And the punishments handed out have to seem like window dressing. The bonus system that paid out billions for "profits" that later turned into losses is intact. There's still no meaningful regulation of derivatives or hedge funds or private equity funds.

I'm sure that somewhere deep in the bowels of the bureaucracies that run the Bank of Japan and the People's Bank in China there are howls of laughter at the idea that the way to fix the U.S. system is to put someone in charge of "systemic risk" and making that someone the Federal Reserve, as Rep. Barney Frank, D-Mass., has proposed. The world's central bankers understand, even if the congressman doesn't, that the Fed didn't use the powers that it had to head off the bubble and bust of 2000 or 2007.

Even if you give the U.S. financial and political system a TARP-sized benefit of the doubt and say these are hard problems to fix overnight, it's still hard to understand why no one has gone to jail. (And I don't mean Bernard Madoff for his decades-long Ponzi scheme.) It's pretty clear that there are legal grounds of prosecuting individuals in the financial industry for fraud, criminal negligence, misrepresentation, violation of fiduciary duty, insider trading, misappropriation of company funds and other crimes. But where are the "perp walks"? Where are the trials with lurid details of birthday parties in Morocco and $15,000 shower curtains? Where the tearful spouses grieving the loss of $4 million second and third homes?

http://articles.moneycentral.msn.com/Investing/JubaksJournal/why-the-ceo-salary-cap-is-a-joke.aspx

[terisan]

1. Great article- Geithner (and Obama) are being demagogues on the Executive Pay Caps.

[AtomicKitten]

3. Geithner and Obama disagreed on the exec pay caps, Geithner prevailed.

http://www.nytimes.com/2009/02/10/business/economy/10bailout.html?_r=1&hp

* snip *

In an interview on Monday Mr. Axelrod did not deny that there were differences of opinion as the policy was being crafted or that he had taken a harder line on issues such as executive pay restrictions...

[terisan]

5. Obama is the Chief Executive not Geithner. The Decision is Obama's. He must take responsibility.

A chief executive has to take responsibility for the official plan of his administration.

[AtomicKitten]

6. I agree that the buck stops at the top.

I just posted something I read today that contradicts your assertion that Geithner and Obama were on the same page regarding capping executive pay.

[napi21]

I don't have a problem with execs getting restricted stock that can't

be sold until the loan is paid. That would actually give them ore incentive to save & improve the institution! It should also help free the credit freeze because a bank doesn't make any money by holding onto their money!

I think you also have to understand, those execs aren;t going to be too thrilled granting millions in bonus money to their underlings when they aren't getting any!

It might not be perfect, but it's a hell of an improvement!

[Frank Booth]

4. I agree with you on the restricted stock -- it's much better than cash bonuses.

But, the option of avoiding the cap by disclosing pay and holding a nonbinding shareholder vote is very troubling.

And the complete lack of prosecutions is infuriating.

[high density]

2. The idea of bonuses in restricted stock is fine by me

In fact it gives these business leaders an incentive to pay the money back to the government. Outside of the mega banks like Bank of America and Wells Fargo, how many banks that want TARP money have more than 25 executives that make over $500k a year?