Bailout pay cuts: One firm's pain is another's advantage

The U.S. Special Master on Compensation, Kenneth Feinberg, is unleashing the public's furor over Wall Street compensation on 25 lucky executives. Of course, were it not for the grace of the American taxpayer, those companies would not exist.

So, the executives at those companies should be grateful to have their jobs. But until they can pay back that TARP bailout money, their companies are going to feel the burn. And their competitors will leap with joy as they hire their best people.

The targets of government comp cop are the 25 top-paid executives at American International Group (AIG), Bank of America (BAC), Citigroup (C), General Motors and Chrysler, and the two automakers' finance arms, GMAC and Chrysler Financial. They'll suffer up to a 90 percent salary cut, according to the New York Times -- but they'll get some of that back in stock.

Then there's the little matter of perks. Instead of being lavished with them as these execs have been in the past, any executive seeking more than $25,000 in country club memberships, private planes, limousines or company-issued cars will have to apply to the government for permission. I would love to be in the meeting where they beg for those perks.

Overall, this is a plan that just longs to be scrutinized for the gap between what will be announced and what actually happens. For example, will these executives find a way around the effort to restrict their pay? Will these companies experience an exodus of the people who currently receive that high pay? Will it be easy to fill those top executive slots with competent people who are willing to accept the lower pay and tighter government scrutiny?

In the meantime, the Wall Street competitors that aren't bound by these pay restrictions will be able to hire the most talented people at AIG, BofA and Citigroup, assuming the TARP-free banks can find talent that is untainted by the failures of their current employers. This raises the uncomfortable possibility that the Treasury's comp cop will end up cutting off the noses of these seven companies to spite their faces.

I estimate that the move will trim a mere $45 million in salary, assuming that the 90 percent cut for the top 25 executives leaves them with an average salary of $200,000 per year. In other words, for relative pittance in compensation that might be saved, the government's $250 billion bailout investment could crumble as the departing talent takes customers from these wounded giants with them to their new employers.

And then there are what appear to be the special deals. For example, the Washington Post reports that the comp cop blessed the $10.5 million pay package for new AIG CEO Robert H. Benmosche. That plan would pay Benmosche $7 million a year -- $3 million in cash and $4 million in fully vested common stock -- and he'd be eligible to receive annual long-term incentive awards of up to $3.5 million.

People are still angry about banks like Goldman Sachs Group (GS), which paid back its $10 billion in TARP money and is still getting $52 billion in debt subsidies from the government. Goldman will be paying out $23 billion of the $140 billion in total 2009 Wall Street bonuses -- a year after the U.S. saved it from oblivion with the $12.9 billion, 100-cents-on-the-dollar coverage of its credit default swaps with AIG.

The U.S. can only hope that the $45 million it saves will sop up the public's anger without causing a talent drain that cuts the odds of getting that TARP money paid back. Maybe the best hope for achieving that outcome is if the sting of the pay cuts spurs those executives to pay back the TARP money faster so they can get back to the bad old days of huge pay, bonuses and perks.

The bottom line is unless we change the incentives that drive Wall Street to take huge risks, we'll be back to those days in the blink of an eye.

Peter Cohan is a management consultant, Babson professor and author of nine books, includingCapital Rising (due in June 2010). Follow him on Twitter. He owns AIG and Citigroup stock and has no financial interest in the other securities mentioned.

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