The Obama administration plans on putting in the next batch of bailout money a provision limiting the pay of CEOs of companies that accept money to $500,000 annually plus normal stock dividends.
The first thing must be said is: Bravo and about bloody time someone did something. Rampant CEO pay was first an outrage back in the 1980s when it hit the ratios of 50 and 70 and 90 to one (of the average employee's wage). Then it got to 200-to-1, and even eventually 300-to-1. Nobody truly prominent in the public sector did or said a thing. It was and is grotesque. And in the first bailout, the Bush administration, of course, left executive compensation provisions vague. So this is great.
But economics is all about producing desired behavioral outcomes, and a part of me does wonder what kind of behavior will outcome as a result of this, if it's passed. Yes, yes, yes, a half-million dollars is a lot of money and we should all be so constrained. But let's dispense with the populist lectures and look at this economically: for a lot of these people, CEOs at this level, $500,000 is awfully low.
So: why wouldn't they just refuse to accept bailout money? I suppose some will. But many won't be able to afford to refuse to accept. They're up against it. If you're large bank CEO Smith, making $2.5 million a year in New York, and the government dangles, say, $230 million in front of you to start making loans again, are really not going to accept it over $2 million a year in salary for yourself, especially knowing that CEO Jones at the large bank up in Boston is going to accept it and get the $230 million?
Another question I have is what percentage of bailout giftees this provision will affect. Remember, lots of round one TARP money went to small- and medium-sized banks. The president of the Farmers' and Merchants' Bank of Springfield doesn't even make $500,000. The average bank president's salary, I was deeply shocked to see this morning, is a paltry $130,000, and that with 20 years' experience.
So this will affect only the big dogs. I guess. There are these sentences in the Times' account:
Crucial details remained unclear on Tuesday night, including whether the restrictions would apply to all companies that receive money under the so-called Troubled Asset Relief Program, or TARP, or whether they would apply only to the "exceptional" companies that were being rescued from collapse.
Under the Treasury's $700 billion rescue program, most companies that have received money so far have been considered "healthy" rather than on the brink of collapse.
But five of the biggest companies to get help — Citigroup, Bank of America and the American International Group, General Motors and Chrysler — were all facing acute problems. And top executives at those companies made far more than $500,000 in recent years.
Presumably, those near collapse would tend on average to be the larger recipients, i.e., those with higher CEO pay scales. I guess, eh?
It's all quite complicated. But boy, this sure will change some lifestyles in Manhattan!
