My friend Yitzchok has this to say about Executive Payments

Executive Pay Limits: A Quick Analysis of Best Intentions

The media has been reporting on Obama's new salary cap proposal, which will reign in executive pay at nothing greater than $500,000 a year if the company is taking bailout cash (1), (2). You can read the versions of CBS and Bloomberg in the links provided below. Below, I am going to provide my quick analysis on the salary cap concept.

There is no argument here that financial/banking executives should not take super-sized salaries when receiving bailout cash until the cash is returned. The company is not performing, so they should not be compensated for driving the business into the ground, whether the factors are endogenous or exogenous. However, there is a rub to a cap, which are market forces that will manifest into a brain drain. The brain drain will convert these best intentions into the nails that seal the coffin.

And this brain drain will revolve around players who 1. have more than enough money to live without working and 2. those people who could easily start a new firm or join another firm in order to make more than the cap. Healthy firms will pay top dollar for that top talent. And, as these employees leave, the human capital will be drained to a point where bailed out banks will go deeper into the red. Wall Street does not slave unless paid.

The bottom line is that the executives and other employees who have made over $500,000 in the past will either play this game or not. And, my bet is they will not play. They will leave these bailed-out existing companies to either form new ones or join healthy ones. They will start new, and they will not allow the cap to hamper the reward system they have been endeared to so much. The bailed out existing companies will continue in their death spiral as they will not be able to retain the employees that actually make the businesses go. And, that will be the end of them. All the money thrown at them will be good money thrown at bad.

In conclusion, they should have been left to fail from the very start in order to minimalize the impact on the taxpayer. The very idea that they can be bailed out serves as mechanism to take wild risks. If the business model rewards such risk taking, then they should be allowed to fail until the business environment teaches them how to best run things. And, a bailout does not serve such a purpose.


(1) http://wcbstv.com/politics/executive.pay.limits.2.927082.html
(2) http://www.bloomberg.com/apps/news?pid=20601087&sid=aYyKmUuU4HwM&refer=home

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1. US 2-Year Treasury: 0.25% yield during the Q4 2009 to Q1 2010 period.
2. US 10-Year Treasury: 1.5% yield during the Q4 2009 to Q1 2010 period.
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