The Problem With Pay Limits
I understand why Kenneth Feinberg is chopping the pay at companies that received TARP money. There are two reasons, on face, why this is a good idea. One is a simple moral one — if you’re on the dole, you shouldn’t be getting multi-million dollar paydays. The second is more long-term: a bonus structure which encourages people to make big profits at the end of every year will encourage risky activities which will then lead to the companies’ and the economy’s collapse. Also, there’s the problem of poor corporate governance, where high-up officers in companies stock boards with their friends who have no interest in thinking rationally about pay.
The problem, of course, is that there are a bunch of financial institutions, namely the investment banks bank holding companies who have paid back their TARP money, who are still receiving government support in terms of cheap Fed financing and rock-bottom interest rates who are not under Feinberg’s jurisdiction and are going back to giving out bonuses like it’s 2007 and “Irreplaceable” is burning up the charts all over again. More generally, there will eventually be a time when no banks will be in the position of having not paid back their TARP money and the legal claims Feinberg or his successor will be much murkier. There’s also the problem of highly paid traders and executives simply going to other firms who aren’t having their pay schedules set by the government.
But it would obviously beneficial to society if we had a financial sector that was smaller and where the executives and traders were much less wealthy. And it seems like the only way to do that well is to think more structurally. So that means a combination of regulations on size and riskiness on the front-end and higher taxes for the rich on the back-end. Obviously, it’s much harder to do something that will actually work than to take advantage of populist anger against the least-liked people in America, but this is really important stuff.
