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September 22, 2008

Capping Executive Salaries in the Bailout

Update: I was wrong to try to hedge the bailout with conditions. We should just say "no". see http://blog.tomevslin.com/2008/09/just-say-no.html

Treasury Secretary Henry Paulson believes that his ex-colleagues on Wall Street would let their companies and the economy go belly-up if their compensation is reduced. Here he is quoted in The Wall Street Journal:

"Mr. Paulson is resisting efforts to limit the pay of executives whose firms participate in the program and plans to fight it "hard," according to a person familiar with the matter. He fears that provision would render the program moot, since many firms might choose not to participate."

This is very helpful because it tells us that Paulson will NOT limit executive pay if granted the hugh powers proposed in the administration draft of the bailout bill. That makes it essential that such limits ARE written into the law. It also makes me doubt whether his judgment is good enough for anywhere near such broad powers.

It is a good thing, of course, if strong companies do NOT participate in the bailout; they don't need the help and the cost to taxpayers is reduced. So that's not a problem.

If the weak firms are really going to go bankrupt, their executives will get neither their salaries nor their outsized pensions; so certainly they'll take the bailout even with salary caps. In case they won't, regulators will be able, in most cases, to force their dismissal as will the pension funds and other big shareholders – or even little shareholders who can sue. Henry, what are you thinking?

Some commenters on yesterday's post have said that we don't want the best and brightest to leave the firms that need help. That's more rational than Paulson's argument but doesn't convince me. We DO want the leaders who got the firms into the mess to go. We don't leave losing managers in charge of sports teams and they shouldn't be allowed to stay in charge of companies either. They'd be gone in bankruptcy and they ought to be gone in bailout.

Could we get good new leaders for these firms for "only" a million dollars/year? That's the most important question. The answer is "yes, of course". There are many less jobs for bankers than there were a year ago – not altogether a bad thing. Where are the bankers who want higher compensation going to go? Are they going to become rock stars or athletes? The strong banks have also had layoffs; they don't need many more high-priced executives. For the confident and ambitious, the resume opportunity in saving moribund enterprises will be priceless. For those whose life styles can't be supported at this level, too bad.

In fact the bailed-out banks will do better without the drain of excessive executive compensation. That may even put pressure on their stronger competitors to reduce their overpayments. But maybe that's wishful thinking.

The most important favor Paulson has done us with this position is to make it clear that a blank check bailout will be worse than no bailout at all – it'll turn into an executive relief bill. I appreciate him being so frank; he coulda said he'd study executive compensation later.

Just in case we don't have a bailout, Jeff Jarvis has suggested some other uses for $700 billion here.

Comments on yesterday's post were particularly lively thanks to Fred Wilson's courtesy; he quoted part of the post BUT asked his readers to do their commenting over here on Fractals of Change.

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