Executive pay cap could have unintended consequences
NEW YORK -- Salary caps have changed the way pro sports leagues run their businesses and pay their stars. Now it's Wall Street's turn to deal with the wrenching changes caused by capping salaries.
The government's move Wednesday to slap a salary cap on top Wall Street executives at firms who hit up taxpayers for big cash infusions will have bigger ramifications than just shrinking the million-dollar paychecks of financiers, compensation experts say.
By limiting annual pay to $500,000 and dishing out additional pay in restricted stock that can't be cashed in until the government bailout money is paid back, a host of unintended consequences may result, ranging from a brain drain of top talent to a potentially less-generous approach to paying employees at other financial firms.
"The new guidelines will have a chilling effect on executive compensation at most financial companies," says Ira Kay, an executive pay consultant at Watson Wyatt.
The aggressive push to limit executive pay follows a backlash caused by last week's revelation that Wall Street firms paid out more than $18 billion in cash bonuses in 2008, one of the worst years in financial market history. President Obama has called the rich payout "shameful," as it was doled out during tough economic times and after taxpayers injected hundreds of billions of dollars into the banks under the Troubled Asset Relief Program.
It also comes ahead of the government's soon-to-be-released plan on how it will dispense the $350 billion in remaining TARP funds to banks in an effort to get credit flowing again.
In announcing the new pay limits, which apply only to firms that accept fresh TARP money, Obama said that he doesn't want to deny wealth to heads of successfully run U.S. businesses. "But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by taxpayers," he said.
Compensation experts say this is the first step in fixing what critics say is a Wall Street compensation system gone wild.
