Where Pay Caps Fail

(AP)
So screw the SOBs. After nearly wrecking the global financial system, they continue to lead the sort of gilded lives that make Lifestyles of the Rich and Famous look like the set of The Grapes of Wrath. And since we're obviously inured to the idea - to borrow Matt Taibbi's classic phrase that the financial fat cats are going to jam their "blood funnel into anything that smells like money," why not issue a little pay back (no pun intended.)

So it was that White House pay czar Ken Feinberg issued a directive which would cap pay at $500,000 for the 26th through 100th top-paid employees at firms who received exceptional assistance from the Troubled Asset Relief Program.

As noted, I can't muster sympathy for the nimrods that got us into this predicament in the first place - not with the (official) unemployment rate hovering around 10%. But libertarians and conservatives aren't out of bounds when they express discomfort at the precedent. Do we really want Uncle Sam getting into the business of deciding pay scales? Yes, it is different this time because we're talking about billions of dollars in taxpayer infusions now propping up the likes of AIG, and Citigroup. I'll let the constitutional scholars out there parse that one.

The more immediate question is whether this is a holiday show to mollify the folks back home or the start of a move toward structural reform. One day the financial crisis will lift. At that point, will things return to "normal?" That's an obvious concern considering how business as usual led to business nearly going bankrupt. To Feinberg's credit, the incentives only will be awarded in return for "real performance," reports CBS News White House correspondent Mark Knoller. What's more, the "total cash component can't exceed 45 percent, while "long term" compensation - which must be held by at least three years - must comprise at least half of any package.

Earlier this year, Cornell economist Robert Franks pointed out that CEO pay caps generally were not a good idea - with one exception: The financial services industry. Here's why, according to Franks:

"A money manager's pay depends primarily on the amount of money managed, which in turn depends on the fund's rate of return relative to other funds. This provides strong incentives to invest in highly leveraged risky assets, which yield higher average returns. But as recent events have shown, these complex assets also expose the rest of us to considerable systemic risk. On balance, then, the high pay that lures talent to the financial industry may actually cause harm. So if Congress wants to cap executive pay in financial institutions receiving bailout money, well and good."

More recently, Harvard Law's Lucian Bebchuk, Alma Cohen and Holger Spamann revisited that same theme in a paper analyzing executive compensation at Bear Stearns and Lehman Brothers between 2000 and 2008. You have to hope that the right people are paying attention. Ultimately, it's going rest on the private sector, not federal appointees like Feinberg, to do the right thing. Will they? The only sure thing is that memories are notoriously short.
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    Charles Cooper is an executive editor at CNET News. He has covered technology and business for more than 25 years, working at CBSNews.com, the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet. E-mail Charlie.

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