Feds crack down on executive pay

What happened

In a sweeping assault on king-size executive pay, the Treasury Department imposed sharp limits on compensation at the seven firms that received the biggest federal bailouts. Under the plan announced last week, the top 25 executives at each of the seven firms will see salaries and bonuses slashed by an average of 50 percent. The plan applies to executives at AIG, Bank of America, Chrysler, Chrysler Financial, Citigroup, General Motors, and GMAC, which have received a combined total of $240 billion from the Treasury’s Troubled Asset Relief Program. Cash pay for the top 25 executives at each firm will fall about 90 percent, while bonuses will be restricted largely to company stock. “These numbers are brutal,” said compensation consultant James Reda. “Reductions such as these haven’t been seen even in companies that are bankrupt.”

In addition, the Federal Reserve said it would evaluate compensation levels in assessing the soundness of management at the 6,000 banks it regulates. Banks with compensation incentives that encourage excessive risk taking will be required to revise their pay systems. “We believe in success,” President Obama said. “But it does offend our values when executives of big financial firms—firms that are struggling—pay themselves huge bonuses, even as they continue to rely on taxpayer assistance.”

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What the editorials said

“Under normal circumstances,” we’d be opposed to federal pay limits, said The San Diego Union-Tribune. But “these are not normal circumstances.” The firms that accepted taxpayer bailouts also accepted the strings attached to them. Now that American taxpayers effectively own these firms, they have “the absolute right to help decide how they are run.”

Even so, the pay limits are a disaster in the making, said The Washington Times. As formulated by Treasury pay czar Kenneth Feinberg, a trial lawyer with no business experience, the curbs will only encourage executives to “leave for greener pastures where the Obama administration does not hold sway.” Even before Feinberg announced the cuts, more than a dozen executives at AIG and Bank of America departed rather than accept the strictures.

The focus on pay misses the larger problem, said the Los Angeles Times. Both the Bush and Obama administrations gave some firms an “implicit guarantee” that they won’t go bankrupt. That has “undermined the natural incentive Wall Street firms had to manage risk.” What really has to change is the notion that some firms are “too big to fail.”

What the columnists said

The pay curbs are driven by a fundamental miscalculation of the causes of the financial crisis, said Rich Lowry in National Review. For the most part, financial firms didn’t “blow up” because their executives took absurd risks to capture enormous bonuses. They ran into trouble “because they got caught up in the bubble mentality and thought their risks weren’t as dangerous as they proved.” The pay limits might give anti-business types “psychic satisfaction,” but they’ll do nothing to address the real source of the crisis—overconfidence, which will forever prove immune to “politically motivated symbolism.”

Sure, the crackdown is only a “symbolic gesture,” said David Callaway at Marketwatch.com. But it’s welcome all the same. Even if the limits don’t really hold down executive pay—and judging by the swelling bonus pools, it’s doubtful they will—they send an important message. Wall Street has been warned that a return to business as usual is unacceptable, and that if it doesn’t clean up its act, “a new form of Teddy Roosevelt’s stick-swinging, trust-busting, bull-moose-roaring corporate overhaul is suddenly not out of the question.”

Sic ’em, said Colin Barr in Fortune. Those “traders and suits don’t exactly have an unblemished record.” And in the current job market, the firms that lost executives should have little trouble finding replacements. It’s high time that financial executives shake off their sense of entitlement and acknowledge what is glaringly obvious to “cubicle dwellers everywhere”: The fact that “someone has a big, high-paying job doesn’t mean they’re good at it.”