Bonus caps for executives won't help

President Obama wants executive pay caps at TARP-funded companies, but it isn't looking good. According to the Wall Street Journal, "The Obama administration is dropping its plan to cap salaries at firms receiving government bailout money, leaving them subject to congressionally imposed limits on bonuses, according to people familiar with the matter."

The plan could cap bonuses at one-third of overall compensation. This is a bad idea because it produces the exact opposite of the pay for performance culture that is the hallmark of that very rare phenomenon known as strong corporate governance.
This will only serve to worsen one of the fundamental truths of executive pay: the best CEOs are always underpaid and the worst ones are always overpaid. Who is more overpaid: a CEO who earns $500 million but creates $1 billion in value, or one who earns a $500,000 salary but loses $100 million in shareholder value? The answer, of course, is that the one who earns the smaller amount of money is overpaid. By restricting bonuses for good performance, President Obama is ensuring that lousy CEOs will be overpaid and great CEOs will be underpaid. That might be good politics but it's lousy corporate governance.

The goal of executive compensation should be to attract, retain and motivate the people who can create value for shareholders. Period. President Obama has a chance to use all the brain power he's surrounded himself with to implement innovative ways of paying people with his twin goals in mind: the stability of the financial system and making sure that taxpayers are made whole on the money they've "invested" in so many of these poorly run companies.

To accomplish the latter, he might consider borrowing a line from U.S. District Judge G. Kendall Sharp, who sentenced boy band con-artist Lou Pearlman to 25 years in prison, but added an interesting twist: For every million he helps regulators recover for his victims, his sentence will be reduced by one month.

So what if Obama applied that and offered to pay CEOs at TARP banks a percentage of the cash returned to the United States Treasury Department while requiring that banks maintain strict capital ratios to prevent a systemic problem from ensuing in the future? Clawback provisions could be added to the contracts to penalize executives who return money only to come back for more again later.

This is just one idea. There are many more ways that innovative executive pay policies could be implemented at TARP-backed institutions in a way that would ensure that CEOs and others will be paid in a way that dovetails with the interests of the taxpayers who are now major stakeholders in these companies. Unfortunately, Obama and Geithner have opted for the asinine route of arbitrary caps on bonuses, a policy that will lead to poor performance, sacrificing the billions we have invested in these companies at the altar of populist rage over high pay.

But here's the truth, Mr. Obama: If a guy is smart enough to generate $50 billion in value for taxpayers and we only have to pay him $200 million, that's a deal worth making.
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