Bob Cropf

Obama plans executive pay ceiling

In economics, Obama on February 4, 2009 at 5:56 AM

The Obama administration plans to restrict executive pay to $500,000 annually, according to this article in the New York Times. This restriction would only apply to the executives of companies receiving significant amounts of bailout money.

The article goes on to say “Executives at companies that have already received money from the Treasury Department would not have to make any changes. But analysts and administration officials are bracing for a huge wave of new losses, largely because of the deepening recession, and many companies that have already received federal money may well be coming back.”

This is a politically popular move in light of rising taxpayer fury at the recent Wall Street bonus scandal and through-the-roof executive compensation packages.

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  1. A good start but It’s time to do more. Write your senator to pass a law to return the bonus money already paid to failed executives.
    It’s easy to do here: http://returnthebonus.wordpress.com/2009/02/04/executive-pay-limits-revealed-a-good-start/

  2. Why $500K? I am thinking this still does little to address the moral hazard… I understand the CEOs still have personal expenses (mortgages etc) but the explanation is that too tight restriction would make CEOs more hesitant to take advantage of the help. Well, if the bank is insolvent or near insolvent, if the CEO chooses not to take the help because it means a big pay cut, do we really want to be paying those CEOs anyway? I don’t buy that this is what it takes to keep the talent. What kind of business sense (talent) have they shown? What kind of business sense does it show to let your company tank over your pay package? Let the shareholders give them the boot if they won’t take it. I am certain there are plenty of unemployed bankers that would be chomping at the bit to bring one of these walking dead back if given the opportunity.

    Interesting article (about 1yr old) about why neoclassical economics falls short, the primary assumption upon which the whole thing rests is invalid: individuals are irrational actors!

    http://www.newyorker.com/arts/critics/books/2008/02/25/080225crbo_books_kolbert

  3. By the way, I heard it advocated that CEO compensation be anchored to the lowest paid federal government employee since the companies are now taking public money. In other words, CEOs cannot make more than X times what a Marine private makes (if that is the lowest paid). Where are the Jack Walshes of the world that are going in for $1/yr???

  4. Now that would be really interesting. I think that there will be a lot more attention paid to outrageous corporate salaries and bonuses in the future. The question is whether there is enough political will to do something. Stay tuned.

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