Obama caps executive compensation

February 4, 2009 5:41:57 PM PST
President Obama announced a dramatic new government effort to stop executives from padding their wallets with taxpayer bailout money. He's capping pay at $500,000 for senior executives whose companies receive money from TARP, the Troubled Assets Relief Program.

This is a move that will be popular on Main Street, but not welcome on Wall Street.

Shareholders have been willing to pay their CEO's millions of dollars to run companies. But with taxpayer dollars involved, there will be tight strings attached.

The outcry has been loud over billions of dollars in bonuses paid out to financial managers as the economy was crashing.

President Obama is applying the brakes.

"Top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000," said President Obama.

For example, the CEO at JP Morgan-Chase was paid $28 million last year. The CEO at Bank of America, almost $25 million and the average CEO pay for the first-round of TARP recipients was $844,000.

Companies receiving federal aid will also have to make public all perks and luxuries given to senior executives.

"This is America. We don't disparage wealth. We don't begrudge anybody for achieving success. And we certainly believe that success should be rewarded. But what gets people upset, and rightfully so, are executives being rewarded for failure," said President Obama.

UC economist and finance professor Benjamin Hermalin says limiting the CEO's short-term pay could make them more cautious.

"One might view them as having been quite reckless in the past. On the other hand, if they're too cautious and they don't lend enough or they're too tight with credit, then that's just going to exacerbate the current situation," said Prof. Hermalin, Ph.D.

Besides focusing on banks, the president has also been meeting with senators looking to cut billions in spending from the stimulus bill.

"Unfortunately, Democrats just keep throwing more money on top of an already incredibly bloated bill. At some point we're going to have to learn to say no," said Sen. Mitch McConnell (R) Kentucky.

There could be fallout from the president's tough stand on pay.

Business consulting firms warn that limiting pay to $500,000 could make it difficult to retain or to recruit executives.