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Cutting bankers' pay

The Obama administration is getting serious on bankers' pay:

The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.

The cuts will affect 25 of the most highly paid executives at each of five major financial companies and two automakers, according to the sources, who spoke on the condition of anonymity because the plan has not been made public. Cash salaries will be cut by about 90 percent compared with last year, they said.

The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.

At AIG, no executive will make more than $200,000 in total compensation. "These guys are effectively civil servants now," comments Felix Salmon, "and they deserve to be paid as such. And if they have any fiscal responsibility at all, they will have saved up a huge amount of their past compensation to tide them through this fallow period." Alex Tabarrok, on the other hand, predicts "chaos."

By Ezra Klein  |  October 22, 2009; 11:29 AM ET
Categories:  Financial Crisis , Financial Regulation , Solutions  
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Next: A difficult graph for health-care reformers


What will it take for there to be a real progressive tax code? Uncap FICA, treat capital gains like income from work.

And remember this:

Posted by: AZProgressive | October 22, 2009 11:44 AM | Report abuse

Going Galt is one of the most bizarre ideas from the libertarians. Solidarity equals communism, except when *we* do it? That said, if this crew walks off, it will be a boon for America.

Tabarrok is becoming increasingly "marginal." If Cowen hasn't been pumping out the posts to drive the Galt one off the page, he really should start now.

Posted by: trevindor | October 22, 2009 11:54 AM | Report abuse

It only applies for banks and companies who still owe money to Fed. What about Goldman or other banks which are free of the clutches of Fed and are now free for huge bonuses? It is clear that to control those, so that a Great Recession does not recur, there is political capital needed and President Obama is reluctant to spend that.

Sometimes I think that only when White House stares at the sustained drop in public support to their policies and approval rating (which dipped below 50%); then the Administration will wake up to their responsibility of holding all bankers accountable. Till then we will only get marginal and piecemeal changes.

Posted by: umesh409 | October 22, 2009 11:54 AM | Report abuse

Look at the incentive: Any current employee of AIG whose market value is much above $200k now has a strong incentive to work somewhere else. And AIG will be unable to similar attract people to fill those roles. Was this the government's intention?

Felix is right. They are civil servants. But that's not what they signed up for so why wouldn't they switch jobs?

Posted by: mbp3 | October 22, 2009 11:55 AM | Report abuse

$200k is $200k more than a bankrupt AIG would have been able to pay.

"Any current employee of AIG whose market value is much above $200k" should be as much an oxymoron as "any Hall of Famer who plays for the Detroit Lions."

They're lucky to have jobs at all, and when they apply for others, I hope a resume that leads with "I helped destroy my company and the world economy" will be at least a slight negative -- though I won't hold my breath.

Posted by: dpurp | October 22, 2009 12:15 PM | Report abuse

dpurp - Just because AIG could have gone bankrupt doesn't mean that there isn't a market for the skills of many of their employees. The market for some of them is places like Goldman, Morgan Stanley, JP Morgan etc. All these places can pay them more than $200k. Why won't they leave AIG for these other firms? AIG was brought down by the actions of a very small % of their employees and losses in a small % of their total businesses.

The government's sledge hammer solution will not be effective as punishment.

Posted by: mbp3 | October 22, 2009 12:26 PM | Report abuse

My read on this is Obama tried to play it nice: we won't mess with your F'ed up pay culture, just don't fight us over regulation. Like always, Wall Street cashed the check and flashed the bird. Now Obama has to do it the hard ...way, having let Wall Street recoup and picked up a bunch of negative baggage for siding with them in the first place.

Posted by: Macfrugal | October 22, 2009 12:33 PM | Report abuse

Conversely, a bunch of AIG geniuses making only $200K per year could drive down compensation in the rest of the market. It's called "competition".

Posted by: tl_houston | October 22, 2009 1:43 PM | Report abuse

I tend to believe that there are very capable financial minds who would work for 200K a year with the prospect of turning around a bankrupt business and reaping the rewards, long term.

Posted by: matthewyoungblood | October 22, 2009 3:06 PM | Report abuse

If you don't think that the AIG execs are worth more than $200,000, then just fire them. Bring in new managers with competitive compensation packages. Look at private equity firms - they pay very well for what they perceive to be top talent, and I doubt they enjoy throwing money away for no good reason. Cutting average pay packages from $1,000,000 or $2,000,000 to $200,000 for a few dozen people but seeing your best people leave is a penny-wise, pound-foolish strategy. If a little extra profit is worth hundreds of millions of dollars, spending a few million more to attract and keep the best talent is a good investment. Since I own a share of these companies, I want talented, well paid managers running them - it does me no good to get excited over the guys at AIG making less money if it reduces the value of my investment!

The reason capital gains aren't treated like income from work is because inflation creates a good portion of so-called 'capital gains'. Let's say you have a stock investment which grows from $100 to $125 over five years, and the price level grows from 100.0 to 115.0 over those same years. At a 15% tax rate, you pay $3.75 in taxes. However, you also 'paid' a far higher sum due to the inflation tax, so your after tax, after inflation capital gain is down to 5.4% (121.25/115 x 100), which brings the annualized pre-tax, pre-inflation growth from around 5% to barely 1%! Capital gains should be treated as work if and only if they are indexed to inflation. Since that would be very complicated to do, a quicker but less precise fix is to tax capital gains at a lower rate. Raising the top capital gains tax rate to 39.6% would have made the trade shown above profitless. As Mellon (who didn't get everything correct I will admit) put so well: taxes which are inherently excessive are not paid. Tax capital too much and you wind up with rich people spending less on stocks and more on yachts and rolex watches (and perhaps tax free munis).

As for FICA caps, the more you break the link between benefits and funding, the more of a welfare program it becomes, and the easier it is to destroy the program. The political mood of the country goes in cycles - if your Social Security fix is only a combination of eliminating the payroll tax cap and progressive price indexing, there is a better chance that the next wave of conservative government is able to successfully privatize the program.

Posted by: justin84 | October 23, 2009 9:43 AM | Report abuse

On the executive pay issue, I'd like to present exhibit A:

Posted by: justin84 | October 23, 2009 10:18 AM | Report abuse

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