US President Barack Obama and Timothy Geithner, the US treasury secretary, are right to constrain pay while taxpayers are on the hook. But to avoid an exodus of some of the talented executives, they need to turn the financial industry around—they should consider more flexible methods than a straight cap. One might be to let banks pay more, but only if they also repay taxpayers.
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Banks that have taken money from the treasury’s Troubled Asset Relief Program are already unable to claim tax deductions on pay exceeding $500,000 (Rs2.4 crore) for their five top executives. Financial firms that in future need “exceptional assistance” from taxpayers will now have to limit their top bosses’ annual pay to that figure, with the caveat that the total can be higher as long as the rest is paid in restricted stock accessible only after any government investment is fully repaid.
The trouble is that could take years. After all, companies such as American International Group Inc., Bank of America Corp. and Citigroup Inc. have already taken tens of billions of dollars each in government funds. In the meantime, the best managers at other such institutions could jump to hedge funds or other financial firms, or move away from the US, where their pay is not subject to so many restrictions.
Obama and Geithner have, to be fair, limited the outright cap to only those companies taking massive government aid. And they have some other sensible ideas. Giving shareholders a chance to express their views on top executive pay, even in a non-binding vote, is one. It’s also good that they left open the possibility of additional compensation that kicks in once the government is repaid. Even so, a rigid cap on annual pay looks more populist than productive.
Populist move? US treasury secretary Tim Geithner (left) and President Barack Obama on 4 February announced the decision to cap salaries. Charles Dharapak / AP
The government’s legitimate interest in constraining pay might be addressed more flexibly through comparisons with public companies or other financial firms in general or the use of other relevant yardsticks. Longer term, top finance executives’ pay should include elements that are deferred and subject to clawbacks if profits from one year prove illusory the next.
For now, though, there might be ways to split the difference. Companies could, for instance, pay their top people in preferred stock and repay the same amount of the government’s investment. That way, the bigger the pay packets (within the limits set), the quicker taxpayers would get their money back. As one element of a more adaptable plan, that at least would bring bankers’ interests closer into line with those of taxpayers.