President Obama set a limit today on executive pay for companies receiving federal bailouts. The World's Matthew Bell looks at the implications of the new limits.
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MARCO WERMAN: I'm Marco Werman. This is The World, a co-production of the BBC World Service, PRI, and WGBH, Boston. Big bonuses, private jets, and lavish junkets could be a thing of the past for some corporate executives. President Barack Obama has announced new restrictions on executive pay. The new rules go like this: if a company takes lots of government bailout money, executive salaries would be capped at $500,000 dollars a year. Now, to most Americans, half a million sounds pretty fair. But as The World's Matthew Bell reports, there's a potential downside to the new rules.
MATTHEW BELL: President Obama repeated his frustration with corporate America today. He criticized executives for taking taxpayer dollars with one hand and then paying themselves billions in bonuses with the other. Mr. Obama said it's that kind of culture, of narrow self-interest and short-term gain that helped bring on this economic crisis, and it must stop.
PRESIDENT OBAMA: This is America. We don't disparage wealth. We don't begrudge anybody for achieving success. We certainly believe success should be rewarded. But what gets people upset, and rightfully so, are executives being rewarded for failure – especially when those rewards are subsidized by US taxpayers, many of whom are having a tough time themselves.
BELL: Mr. Obama announced a $500,000 dollar salary cap for top executives whose employers take large amounts of bailout money.
OBAMA: Companies receiving federal aid are going to have to disclose publicly all the perks and luxuries bestowed upon senior executives and provide an explanation to the taxpayers and to shareholders as to why these expenses are justified. And we're putting a stop to these kinds of massive severance packages we've all read about with disgust. We're taking the air out of golden parachutes.
BELL: All of this makes perfect sense politically, says Peter Hahn, but there are risks. Hahn is an American-born professor at the Cass Business School in London. He says over-regulating executive pay could drive financial businesses overseas.
PETER HAHN: We have to be really careful. If we over-regulate pay, we'll see businesses leave. The government and taxpayers will be stuck with the liabilities if the banks go wrong, but the tax payments will go to other places.
BELL: Hahn says another danger is that top banking executives at troubled institutions might just quit their jobs.
HAHN: If I'm about to run the re-structuring of a financial organization as a senior manager, and I can only get $500,000 a year, again, it sounds like a lot – but I can go work for one of the major consulting companies and get 1 to 3 or 5 million a year. I might as well go walk across the street, work for the consulting company, and get a contract to advise the bank on its restructuring rather than be the person there. So there is a big window where talented people could jump out.
BELL: But economist James Galbraith, at the University of Texas, says let them go.
JAMES GALBRAITH: What you want to do with the banks that have been deeply compromised, so compromised that they are now dependent on federal assistance is to have a team which is going to be fully cooperative with the public purposes. And if someone is – if it's more important to someone to find a niche where they can make as much money as possible, that's not the sort of person you want to have in charge.
BELL: In other parts of the world, in Europe, for example, executive compensation has not become such an issue. Peter Hahn says that has more to do with tradition than anything.
HAHN: In certain ways it's just seen as socially unacceptable for leaders of corporations to get paid outrageous sums. Oddly, we're – in the UK, we're willing to pay our football players and soccer players huge amounts, but we don't like to see our corporate heads who might be responsible for hundreds of thousands of jobs getting the same amount.
BELL: But Britain is also having a debate right now about executive pay. The government there is moving to intervene again in the financial system. In Washington today, President Obama said his administration next week will announce a new plan to get credit flowing again. He also urged Congress to move quickly to pass a stimulus bill to prevent the financial crisis from becoming a catastrophe. For The World, I'm Matthew Bell.
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