I've struggled over the past few weeks on the issue of the "pay czar", Kenneth Feinberg, of the federal government having the opportunity to structure the compensation of the highest-ranking people in the firms who have received, or will receive, US bailout money. Europe is also in the process of putting similar limitations in place.
After careful deliberation, I must say that this concept -- not just the execution -- is wrong, and for many reasons, the most important of which is that it creates a second-class of company in an otherwise free market environment competing for the best talent it can afford and acquire.
A similar situation, though not a perfect example, is the National Basketball Association. Let's say that five of the thirty teams did something very, very wrong. People were fired. The media wrote embarrassing stories. But, these teams still had a schedule to play, season ticket holders to please, TV contracts to fulfill, etc. Six months later, the NBA announces that a further punishment is that the teams now need to have a salary cap that is far below the rest of the teams. How would that play out?
You would have these five teams who couldn't pay their current top talent, and these players would move to teams where they could be paid competitively. Bottom-tier NBA talent would be driven to these five teams since that is all these teams could afford. In a very short period of time, the NBA would have created a two-class structure for the long-term, with the second-class being in a position to rarely, if ever, compete.
Now move to banking, where the movement of talent is even less restrictive. Top positions at banks with pay restrictions will, over the next year or two, be filled either with people who have big loyalty, big stock ownership, or a lack of proven experience. The top talent will have moved to other firms where compensation matches what the believe their worth to be.
The longer-term impact of the pay issue is that banks with pay restrictions will face a talent challenge. The talent challenge will likely mean that most of these banks will suffer competitively. Therefore, these banks will grow slower, make less money, be less creative, create fewer jobs, and pay fewer taxes. Yet we as US citizens own these slower, less profitable companies through the TARP program or other programs.
There is no arguing that some of the pay packages of CEOs in the very firms we've been asked to bailout had been paid a ridiculous sum to perform poorly. The boards should be ashamed. The CEOs should be ashamed. Many of the board members and CEOs should be fired, if they haven't already been. But it seems that creating a much shallower talent pool for these troubled banks makes their recovery, and therefore our payback, much less likely.
What do you think?