Salary caps

SALARY CAPS…. The New York Times reports today that the Obama administration is considering a plan to “impose a cap of $500,000 for top executives at companies that receive large amounts of bailout money.” Better yet, these same executives would “also be prohibited from receiving any bonuses above their base pay, except for normal stock dividends.”

Sounds good. It will apply to those who receive federal assistance going forward — as opposed to those that have already received bailouts — but the Obama administration will reportedly force those companies to “agree to strict monitoring and oversight.”

The interesting part, though, is the early reaction to Obama’s idea.

“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”

Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits will make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms.

What a fascinating perspective. There are a series of companies that have been managed poorly and are on the verge of collapse. They’re going to the federal government, hat in hand, hoping to get tax dollars to keep them afloat. As James F. Reda sees it, a $500,000 salary is “draconian,” and might lead frustrated executives — accustomed to exorbitant salaries disconnected to job performance — to leave the companies they helped drive into the ground. Companies that would no longer exist were it not for government intervention.

Maybe, and I’m just throwing this out there, we shouldn’t care if this cap makes it difficult to keep failed executives on in their current posts.

I suspect there are plenty of sharp people in the business world, anxious to make a name for themselves, would who love the opportunity to get $500,000 to turn around a company facing collapse, with the possibility of a huge pay day down the road if they succeed.

If this is the big argument against “draconian” limits on executive compensation, it’s an awfully good idea.

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