Obama Nationalizes Pay Rates for Certain Executives

Based on the tumble in the stock prices, the markets hate this idea a lot:

WASHINGTON (AP) - President Barack Obama on Wednesday imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money, saying Americans are upset with "executives being rewarded for failure."

Obama announced the dramatic new government intervention into corporate America at the White House, with Treasury Secretary Timothy Geithner at his side. The president said the executive-pay limits are a first step, to be followed by the unveiling next week of a sweeping new framework for spending what remains of the $700 billion financial industry bailout that Congress created last year.

The executive-pay move comes amid a national outcry over huge bonuses to executives heading companies seeking taxpayer dollars to remain afloat. The demand for limits was reinforced by revelations that Wall Street firms paid more than $18 billion in bonuses in 2008 even amid the economic downturn and the massive infusion of taxpayer dollars.

"This is America. We don't disparage wealth. We don't begrudge anybody for achieving success," Obama said. "But what gets people upset - and rightfully so - are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers."

This is what Rush calls "get-even-with-them-ism". There is an emotional need to punish those executives who presided over the failure of their institutions, though some of the people who will be effected by this were not executives with the banks at the time they failed. I can understand it to a point, but when you start doing this kind of stuff you're opening the door to other problems.

Here's what's wrong with nationalizing salaries - you've just removed those institutions from competitive employment.

Let's say a CEO job with a non-bailout bank of comparable size is worth $750,000 a year, while the bailout bank is limited to $500,000. What do you think is going to happen?

The first chance that bailout bank exec gets to move to a similar but higher paid position at a non-bailout institution, he's gone. And what about the now open spot at the bailout bank? In a competitive employment environment that job would be worth $750,000, but now it's only worth $500,000 (not to mention having the government on your back all the time). Talent that's worth $750,000 won't be interested in the position. They will have to settle for less qualified executives and that might tend to compound their problems.

There's another problem that I see with this, and that's the "camel's nose in the tent" theory that one small move can lead to much bigger moves down the road. What if your company has never received a bailout but has a large percentage of its business in government contracts? Will the government be tempted to limit your pay as well on the theory that your high salary is leading to higher government costs and that's just not "fair"?

You know that's where this is leading. Once they do that it's a small jump to just start regulating CEO pay for everyone.