Pay Cuts for Bailout Benefactors

Sources: FT.com: Obama ‘Pay Tsar’ to Order Deep Cuts; CnnMoney.com: Who Cares if Wall Street ‘Talent’ leaves; huffingtonpost.com: Obama Pay Cuts: White House Forcing Bailed-Out Companies to Slash Compensation; WSJ.com: Fed Hits Banks With Sweeping Pay Limits; MSNBC.com: Obama: Excessive Pay 'Does Offend Our Values.'

On Thursday, October 21, Washington set its sights on banks and Wall Street firms responsible for the financial crisis. With dual announcements from the Federal Reserve (Fed) and the Treasury Department, the U.S. government revealed plans for aggressive intervention in future salary decisions within various financial institutions.

Kenneth Feinberg, the special master at the Treasury Department sometimes referred to as Obama’s “pay czar,” announced salary restrictions at seven firms that received special bailouts after the financial crisis. Feinberg warned top executives at the seven firms: Bank of America, AIG, General Motors, GMAC, Citigroup, Chrysler and Chrysler Financial, to expect a 90 percent pay decrease in the cash portion of their 2009 salaries as compared with last year. Salaries will be capped at $500,000 for highest-paid executives. Total compensation for top executives will only decrease by 50 percent, however, because much of what is lost in cash will be given back to employees in stock that will vest over a lengthier period of time. Officials have said that the cap goes into effect for November and December, but employees will not have to pay back funds already received on the year. The salary restrictions will, however, inform next year’s pay and continue until the companies pay back their bailout debt plus interest.

Among new restrictions is the demand that these companies seek government approval before they spend over $25,000 in “luxury” items (country club memberships, company cars and private jet travel). AIG, the company which received $180 billion of the $700 billion bailout, has been singled out for special regulation. At AIG, no executive will receive more than $200,000 in total compensation. The government also charged AIG with finding a way to reduce the $198 million that has already been promised to employees in the financial services division, as that division was responsible for participating in risky trading practices that caused the company’s financial demise.

The Fed plan, unlike the Treasury proposal, includes a vast variety of financial institutions, many that never received bailout assistance. The Fed proposal would allow the government to review payroll policies of these institutions and would allow the government to veto those that encourage risk taking. Under the proposal, the 28 largest banks in the industry would create plans to combat undesirable risk taking and after government approval, the banks would implement the policies on their own. The Fed plan also requires 6,000 other banks to be subject to review by Fed supervisors.

The new regulation on compensation will likely affect how financial institutions all over the country pay those responsible for financial well-being. Criticisms of the new regulation center on the fact that targeted companies are, more than ever, in need of talented executives. If the companies are unable to pay competitive salaries, they will not be able to keep the employees they have or attract rising stars in the field. If companies were to lose their top executives, financial performance would continue to decline, crucially impacting ability to repay their portions of the bailout debt.

Discussion Questions:
1) Do the Fed and Treasury plans sound like concrete ways to change the culture at these financial institutions? Does a severe pay decrease at the top change business or just punish those who have engaged in risky business transactions?

2)As unemployment continues to rise, will good workers quit as a result of the pay cuts? If so, should this be seen as a cleansing of the greed on Wall Street or as a major setback on the road to recovery?

3) A report from the New York Attorney General’s Office found that salaries for top-level bank employees have become disconnected from reliance on their bank’s performance. Should compensation be intrinsically linked to how well the employer performs?