Pay Caps & Populis Rage

So yesterday’s big news was the mandate put forth by the Obama administration that caps executive pay at $500k, for all companies that receive “extreme assistance” from the U.S. Treasury.

Graphic courtesy of the WSJ

For the record I support the idea of limits on pay for executives of companies that are receiving government assistance, however I think they should be in the form of an overall salary cap, so as to allow individual companies a greater degree of flexibility when it comes to rewarding top performers.

Let’s not forget that Wall Street is the land of self interests it’s not the peace corps, and if you take away the motivation(s) that people have for being on Wall St in the first place the net result will be a company that won’t exactly attract the cream of the crop talent wise. Nor will the talent they have perform up to their full potential.

Just think about it at a more pedestrian level: many of us have either worked for or know someone who was worked for a company that pays below market salaries and benefits, a company that doesn’t really reward its top performers, etc. Do we want to turn Citibank (C) and Bank of America (BAC) into companies like that, especially when they owe the taxpayer 100s of billions between the direct support they’ve received and bad asset guarantees?

However there is a larger issue here, namely: populist rage cannot be the basis for government policy when it comes to the economy, bailouts and the rules we impose on companies receiving help. We need to strike a balance between policies that are punitive and policies that are going to enable these companies to be successful in the future, we can either punish Wall St or we can help it get back on its feet.

Case in point: capping individual executive’s salaries makes us feel good and punishes Wall St, whilst putting a salary cap on the company overall allows some flexibility in rewarding top performers. Mind you these rewards will probably irritate people who are trying to make ends meet, but a company that is able to provide said incentives to performers is likely to be able to repay the taxpayer faster.

At the end of the day what’s the goal: to get these companies back on their feet and off of government funded life support, or to punish them for their prior excesses and the fact that their management teams out earn 99.5% of us?

Logic needs to be the basis for the government’s decisions around companies receiving bailouts, not populist rage and/or various political agendas.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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