Nexus: Chapman's Journal of Law and Public Policy

Seemingly an eternity ago now that the news is dominated by the Obamacare debate, back in March President Obama and the Democratic Congress set their sights on executive compensation as the quintessential demonstration of Wall Street greed. The House passed a 90% tax on bonuses for Wall Street firms that received over $5 billion in bailout funds. Citing concerns that the legislation constituted a bill of attainder, the White House wisely chose to oppose such a tax and let the bill die in the Senate.

However, President Obama did appoint Kenneth Feinberg as executive pay czar (one of at least 18) on June 10, 2009. In his capacity Feinberg has the authority to rule on the compensation plans of the top 25 earners of 7 companies that received significant bailout funds and adjust any individual employee’s pay package. Feinberg also has the capacity to set pay formulas for the next 75 highest earners for those companies, as well as have an advisory role for companies that received smaller amounts of bailout funds.

So, what was Wall Street’s response to such regulation? Several of the larger firms that could afford it – such as Goldman Sachs, JP Morgan Chase, and Morgan Stanley – quickly paid back their bailout funds and thus rid themselves of any potential regulation by Mr. Feinberg. These financial firms recognize that significant compensation packages are needed to attract and keep top level talent. Japanese. Swiss, and British firms have already attempted to poach some of that talent away. Many of the banks are now rebounding and are securing investors after scoring profits in two consecutive quarters. Most of the profits are the result of trading, but nonetheless indicate the banks are outside the zone of danger. Such firms have gone back to providing significant bonus payments to their executives and have yet to draw significant attention to themselves.

But other companies that aren’t so fortunate have begun altering their pay structure to have larger base-pay and less bonus. This, however, devoids the company of the opportunity to tie compensation to financial performance. But, it is all that such firms can do to keep their talent from fleeing to greener pastures. It seems odd that the federal government would handcuff firms in which they have a significant financial stake. Forcing these banks to watch as the talent needed to bring those firms back into profitability flees is hardly in line with the federal government’s interests.

If Washington truly believed that such compensation structures led to the risk-taking and inevitable financial meltdown, why bail out the banks so they can repeat the failure? Surely, some smart businessman would become very wealthy by structuring his business and compensation to avoid incentivizing risky behavior. As of yet, there don’t seem to be any takers.

If such compensation structures did not lead to the financial meltdown, why is Washington trying to regulate executive pay?