To Cap or Not to Cap: Obama Answers the Executive Compensation Question

Back on February 12 of this year in a post titled, “Loopholes, Lawyers and Obama’s Executive Compensation Cap,” I wrote that President Obama was considering an executive compensation cap of $500,000, at least for financial institutions that received Trouble Asset Relief Program (TARP) money. I wondered what the actual effects of the cap would be, especially with the workarounds of clever Wall Street lawyers, and I couldn’t help but worry that a compensation cap might dampen efforts to rebuild these institutions.

Well, it turns out that all that worry wasn’t necessary because no cap is coming – at least not for now.

According to the AP article, “Geithner: Admin. Won't Seek Exec Pay Cap Limits,” President Obama and Treasury Secretary Timothy Geithner announced this week that no executive compensation caps are being proposed but some other methods for monitoring and normalizing executive income will be tried. The Obama administration emphasized that they still believe excessive executive compensation played a hefty role in the financial crisis we are all reeling from right now. They don’t want to see that happen again.

Here are some of the details, according to another AP article, “Administration Seeks Ways to Tame Corporate Pay”:

  • Company shareholders will be able to vote on executive pay but their vote will not be binding.
  • Corporate compensation boards will be separate from the board of directors.
  • Corporate boards will be asked to adopt pay practices that encourage long-term growth, rather than short-term gains.
  • Executive compensation will be restricted at some of the companies that received part of the $700 billion in TARP funds, such as Bank of America, General Motors and American International Group.
  • Kenneth Feinberg, the lawyer in charge of delivering funds to the families of victims of the terrorist attacks on September 11, 2001, will be the “special master” and be able to reject any executive compensation at TARP-funded companies that he deems excessive.

I was glad to hear Timothy Geithner quoted by the AP as saying, “We do not believe it's appropriate for the government to set caps in compensation.” That’s comforting. It’s reasonable to try to influence corporations in a more cautious direction, but forcing them to comply with a specific compensation plan seems unrealistic and too invasive.

Hopefully, the era of “I win big or at least I don’t lose anything” will end for American execs. That’s not how life works for most everyone else and I think that “everyone else” is tired of paying to give a few people such a rare privilege.

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