President Obama has announced a limit on executive pay. Officially this only applies to those executives of companies that are receiving federal bailout funds.

If this is the limit of the restriction I do not disagree with the principle of federal input on executive pay for companies receiving bailout funds.

A fixed amount of pay, however, is a poor way to exercise this authority. In such a fluid situation as our financial institutions are in, such inflexibility can be very destructive. While Obama’s plan allows for higher pay in the form of stock that can be sold at a later date (also dictated by this order), such a situation may call for a turnaround expert that would require a higher up front pay and less of a tail compensation.

This order reflects thought, but no experience in such business management realities.

The administration will also propose compensation standards for companies that do not receive government assistance. Here is what this likely means.

While the administration will not dictate private salaries their “recommendations” will likely be reflected in federal contracts and will likely flow to recipients of federal money like your state education and transportation departments. You may therefore be compelled to adapt these standards if you do any business with any of these state agencies. This is the same as doctors being compelled to accept Medicare reimbursement schedules.

This will be clarified as the action takes form. I share the outrage with many regarding a few of the Wall Street firms’ behavior, but this is not indicative of the majority of the financial institutions. The president would be wise to explicitly restrict this control to those firms receiving federal assistance money.

print