The 7 companies who received the largest amount of TARP assistance have been ordered to cut the salaries of their top 25 employees by an average of 90% from last year. Their all-in pay will be reduced by an average of 50% from last year. The cuts affect Citigroup, Bank of America, AIG, GM, Chrysler, GMAC, and Chrysler Financial.
No one in the Financial Products division of AIG will be paid more than $200,000 total for the year.
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that hurts...
oh snap. so i guess those contractually obligated bonuses are no longer contractually obligated.
There is a massive moral hazard in having a bureaucrat regulate pay, as his job is to satisfy his superiors. The Pay Czar ultimately answers to President Obama. Obama has an incentive to garner short-term political capital by jumping on the banker-bashing bandwagon so as to improve the Democrat's strategic position as we gear up for the mid-term elections. He becomes more popular by doing this than by assuring those companies are run effectively for the forseeable future, because he immediately internalizes a large quantity of political capital as opposed to reaping it over a long period of time.
It is unclear that executive compensation was the cause of the financial crisis, but it is clear that a cap on pay makes it harder for these companies to attract and maintain the best talent; see Fahlenbrach and Stulz (2009), Kahan and Rock (2009), Alissa (2009), & Ferri and Maber (2008).
This decision is exceptionally inefficient and poor form.
This is the moral hazard you're worried about???
As far as I'm concerned, this is just a consequence of taking a government handout. Every one of these companies should have gone under, and a couple of them still will.
Edmundo, you certainly make a good point assuming you are referring to the fact these particular bankers will feel cheated, however, I think the issue here is the potential consequence of limiting the pay.
Obviously these people should be thrilled to even have a job and a company to have that job at but you can't lose sight of the intent of the TARP funds. There are certainly differing opinions as to what the consequences of capping pay will be but its hard for me to believe that it won't drive away current/potentially qualified candidates because these current/potential employees will find the pay and opportunities to be more competitive elsewhere.
Maybe the government is making the 'right' choice, but it is been my experience that the government/politicians don't have the slightest comprehension of ECON 101...and these guys are developing standard operating procedures and fiscal policy for companies that are in financial turmoil?!?!? That spells disaster in my book. And although, many people (uneducated) will say 'So, they were going out of business anyways (before the funds)' I said from day one that 'we' should let the free market play out and the chips fall where they may...but the government didn't want to do that.
These jokers in office have no clue what they are doing and as brotherbear pointed out, this IS a moral hazard because the person enacting these constraints (the pay czar) doesn't answer to the Board of Directors or the Shareholders and not to the the real victims of this whole fiasco...the taxpayers.
Regards
Looking forward to seeing what BOA does when it pays back TARP pretty shortly...not sure what it means for Citi since its time horizon is more like 3-5 years rather than 2-6 quarters...
200K????? thats rough
LOL.
GOOD!!!!
so THIS is what I was running towards when I THOUGHT I was running away from communism...there really is no escaping the proleterian revolution, I guess.
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