CapEx

Just four days after calling Wall Street bonuses “shameful,” the president had an even stronger message for financial executives: Going forward, no senior executives of a corporation receiving federal bailout money will be permitted to earn more than $500,000 a year. While taking note of the move’s limited potential impact and the political motives that likely underlie it, we embrace the president’s decision and hope it will foster both discussion and behavioral changes.

Part of the president’s decision should be understood as a well-timed political move. The month of January witnessed accumulating reports of multi-million-dollar bonuses, corporate retreats, and profligate spending in corporations either receiving or courting federal bailout money. Then it was confirmed that Wall Street employees had received $18.4 billion in bonuses for 2008, in spite of dismal performance for banks as a whole. Meanwhile, the Obama administration, riding on a wave of high ethical expectations, has faced embarrassing criticism for political appointees accused of tax evasion and misuse of corporate privileges. Between declining consumer confidence and flagging expectations, it was a prime moment for the Obama administration to demonstrate a proactive, ethically driven engagement with the so-called “reckless culture” of Wall Street firms.

The provisions in the president’s pay limit, now confirmed by the Treasury, will only have a limited effect. The government’s restrictions on executive compensation are firm, with opportunities for additional compensation only through the unpalatable option of restricted stock. The total savings to taxpayers, however, cannot be immense, mostly because the Treasury provisions have a narrow application. First, the provisions will not apply to the $350 billion of bailout funds already spent or allocated. Second, the provisions bypass large-time traders, brokers, and consultants, whose salary and bonuses often surpass the half-million-dollar limit. Third, healthier banks receiving funds through the Troubled Asset Relief Program will be effectively exempted from the provisions. Finally, the Treasury’s directives for increased financial transparency may pressure companies to reduce luxury spending, but they cannot entirely eliminate it.

Political moves, for all their shortcomings, can nonetheless be highly symbolic. In this case, the symbolism in the president’s declaration is both welcome and warranted. In a time of financial crisis, it is important for Americans to have greater faith in the banking system. When the government is doling out large numbers of taxpayer dollars, it matters that individuals feel that their tax money is being spent wisely. We can also hope that the message to corporate executives will be clear: Taxpayers expect discipline, especially from a sector that has come to be seen by many as inept or irresponsible. Otherwise, the distribution of public funds becomes, in the president’s words, “unfair.”

In light of these factors, we hope that executives will rise to the occasion and make do with their salary caps. Wall Street’s image could not be much worse, and executives must take note that taxpayer and consumer confidence matters. In the long run, we hope that this debate sparks a deeper discussion on the extent to which lavish salaries and bonuses by CEOs can be justified, in times of crisis or otherwise. As for now, the salary caps will apply only so long as corporations are relying on the government’s bailout. In other words, the impetus is on executives to demonstrate, by leading their corporations to financial solvency, that they deserve the salaries they receive.