Justin du Coeur (jducoeur) wrote,
Justin du Coeur

Okay, enough hand-wringing over the half-million dollar salary cap...

Recent weeks have seen all sorts of panic about the Obama administration's cap of $500,000 per year in salary for the top executives at banks that get rescued by the TARP program. The rationale for the hand-wringing is that these banks are so *terribly* complicated that nobody with the skills necessary to save them would possibly work for so little money.

Enough. This is nonsense, and counter-productive nonsense at that. People are either being careless about the details, or (in best FOX News fashion) deliberately obscuring them.

Let's get it straight: the salary cap isn't a punishment for the greedy, it's incentive. Why do I say that? Because of the other half of the deal: there is no limit to the amount of "restricted stock" that these CEOs can receive. The restriction here isn't trivial: stock that the CEOs receive can't be redeemed until the banks are turned around enough to pay back the TARP money, with interest. But it can be a *lot* of stock.

So if you're a smart, entrepreneurial CEO with a good plan -- the sort of person needed to rescue these banks -- you are going to *run*, not walk, to one of these jobs. And the pay package you're going to ask for is $500,000 per year -- plus $20 million per year in that restricted stock. Now you have plenty of incentive to do your job efficiently, and to get the bank out of the semi-receivership it's now in. Which is, note, the point.

Yes, it's a bit of a gamble, but if you aren't prepared to make sensible high-stakes bets, you probably don't belong in high finance in the first place. And keep in mind that the bank's stock is probably in the toilet right now anyway, so that nominal $20 million you get promised today might well be worth $100 million after you clean up the mess, if you bring confidence back to the bank. Even by CEO standards, that's serious money. And it's money that is well-aligned with the stakeholders: keeping the bank afloat, getting the stock market behind it again, and paying back the taxpayers.

Mind, it's not perfect -- like all such interventions, it will introduce market distortions. For example, it gives the CEOs massive incentive to pay back the TARP funds, possibly at the cost of the bank's longer-term health. So it's no substitute for improved regulatory oversight. But it's a rather effective (and nicely subtle) measure to help make the new TARP funds under Obama, unlike those from Bush, more likely to actually get paid back in a decently timely fashion...
Tags: economy

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