PJ Media

Should We Really Cap Executive Salaries at Bailed-Out Companies?

President Obama, with Treasury Secretary Timothy Geithner by his side, announced that executive compensation for firms that accept tax payer bailout money in the future will be capped at $500,000 plus restricted stock. They insist that there will be no way to circumvent this limit by granting 7 figure bonuses. Executive compensation on Wall Street certainly needs to be reigned in, but I am not sure that this is the way.

Although I worship at the altar of capitalism, I have been embarrassed and shocked not only at the debased greed of my colleagues but also their total obliviousness and disregard for the economic suffering they have wrought. Much of Wall Street, deposed Merrill Lynch CEO John Thain, and former New York City Mayor Rudi Giuliani have been behaving like Marie Antoinette. Their actions have spawned such outrage that one brave blogger has already suggested that those that fail on Wall Street, the ultimate high risk, high reward profession, should share her guillotine experience. He argues that other professions such as pilots already risk death every day on the job for much less pay.

The phrase “Let them eat cake” certainly flitted in my head when the New York State Comptroller, Thomas Di Napoli, announced that the financial services companies paid a staggering $18.4 billion in bonuses for the year 2008.  Incredibly, it was the 6th largest bonus haul in history despite this year being one of multi billion dollar taxpayer bailouts, the disappearance of several storied Wall Street firms, and staggering losses. At a radically different time, when the Dow was over 10000 and climbing higher in 2004, the equivalent bonus pool was paid out.

The cash and stock distributions tell only a small part of the sense of entitlement of these Wall Street Pooh-Bahs. It can be argued that private planes are a necessity for busy executives, but I am not sure that a vacationing Sandy Weill, the retired former CEO of Citigroup, falls into that category. Citigroup shareholders have suffered a whopping 89% loss in value. Much of the decimation in value was due to Sandy Weill and the management team he built. In addition, the taxpayers had to bail out the mess that he created to the tune of $45 billion. Most normal people would be embarrassed at failing so miserable but not Mr. Weill. Sandy, with his imperial tendencies intact and nary a sign of humility, did not give it a second thought when he and his family hopped on a Citigroup financed private plane for a vacation not a work related trip for a cost of $90,000


John Thain did not behave much better. For some reason, he decided that he was not comfortable working in his predecessor Stan O’Neal’s lavish office, so he redecorated the office at a cost of over $1 million complete with the CEO must haves – $35000 commode and $1200 parchment paper trash basket. I only wish that he had stopped spending the shareholder’s money there. Minutes before the merger with Bank of America was complete, Merrill paid out $4.6 billion in bonuses.

In a argument truly reminiscent of Marie Antoinette, former NYC mayor Rudy Giulani argued that Wall Street needs their bonuses so that the restaurant and bars of New York City can stay open. If my former plumber was granted the bonus instead, he promised me that he would spend it in NYC restaurants. This begs the question why Rudi thinks Wall Street workers are the only ones that should receive undeserved bonuses.

Some will argue that all of these moves were legal according to contracts that were in place. They would be technically right, but this does not diminish my sense of outrage. When one’s entire company is making profits and creating value for your shareholders, I believe that the sky should be the limit when it comes to executive compensation. The converse should also be true. When your company is bleeding losses and taking money from the taxpayer, zero and even negative compensation would be appropriate.

Apparently, the rest of Wall Street disagrees with me. They have such a strong sense of entitlement that they believe their pay should always be in the stratosphere regardless of the status of their employer, the market, and the economy. Although many people in America work hard, financial industry employees believe that they are the only ones that should be compensated for their hard work.

John Thain’s argument that you have to pay bonuses to keep your good people does not hold water with me. Right off the bat, he and I would quibble over his definition of good employees. Good is not how I would describe employees that are responsible for trillions of dollars in losses. Fired would be my preferred definition.

His fear of losing these so called valued workers appears to be inflated. I am not sure losing them would be any great loss. With the brokerage industry in disarray, I do not know where they would go.

Wall Street has to learn teamwork. One of the most absurd arguments for paying bonuses is the lament, “My unit was profitable, therefore I deserve a bonus.” While there are divisions of General Motors that are currently profitable, the employees of those divisions do not expect bonuses while the company as a whole is not profitable.

Having argued so persuasively against excessive executive compensation, you would think that I would heartily endorse Obama’s plan to curtail the salary of executives to $500,000, but I don’t. Obama is swinging the compensation pendulum too far to the other side. As someone with libertarian tendencies, I find it scary that the government is going to intrude to such an extent in the boardroom. Will the bedroom be next?