Executive-Pay Crackdown: Bad for Business?

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Feinberg said the negotiations between his office and the companies were always cordial, but in the end none of the pay plans that the companies proposed to him were acceptable. Even Chrysler had too big a mix of cash salaries and not enough deferred compensation. He also said that no executive was entitled to more than $25,000 a year in perks. Feinberg wrote in the report, "Employees generally should be responsible for paying personal expenses." It was just one of the places in the report where it becomes clear how different the world of executive compensation is from the way most of the rest of us are paid.

The hope is that the new scheme will affect the way pay is doled out on Wall Street and across the rest of corporate America. Still, Feinberg can't touch the big banking outfits that took government money — billions of dollars worth — but have already paid it back. Companies in that boat include Goldman Sachs and JPMorgan Chase, banks that offer some of the most lavish pay packages in the nation. "There are a lot of people who are saying that Washington's restrictions on some banks can more broadly reduce pay," says Leslie Stern, a partner at the recruiting firm Heidrick & Struggles. Stern is not one of those people. "If you don't pay what the market is for the talent, the talent will go someplace else," he says.

But thanks to other compensation regulations in the pipeline from the Federal Reserve Board, there may soon be fewer places to go. The same day as Feinberg's announcement, the Fed said that it would review pay policies at 28 large banks, as well as at a smattering of smaller financial outfits, to make sure that employees aren't being encouraged to take excessive risks. The Fed's authority also stretches to American subsidiaries of foreign firms.

The past year has produced plenty of anecdotes of richly paid bankers and traders defecting to rival companies, foreign competitors or different industries altogether. In March, one top employee in AIG's Financial Products division publicly quit in the pages of the New York Times, claiming that while he had nothing to do with the transactions that blew a hole in the company's belly, he had been loyally working for severely reduced pay in order to help right the ship. When AIG moved to claw back certain retention payments because of — in the words of the employee — "shifting political winds," he walked.

It's difficult to tease apart how much of a broader knock-on effect the current pay cuts will have. It is also hard in many cases to tell what amount of worker dissatisfaction comes from pay limits — either threatened or actual — and how much comes from a company's broader woes. General Motors is reportedly having trouble recruiting a new chief financial officer because the government won't let the automaker offer a salary north of $1 million. That's a real sticking point. But perhaps so is the fact that GM is a company struggling for its very existence — a firm that doesn't necessarily offer the most desirable long-term career path. Or any long-term path, for that matter.

In crafting the current pay cuts, Feinberg spent much time in conversation with the companies that would be curbed. One thing he demanded from each: a list of the 100 highest-paid employees. Bank of America's list arrived with a caveat: in the wake of BofA's tumultuous merger with Merrill Lynch, 45 of those 100 top-paid employees had already left. Companies operating within the new government rules may very well lose top workers to firms that can pay more. But they may also lose workers to firms that are simply better places to work.

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