Executive Salary Cap Is A Political Sound Bite

Barack Obama announced executive salary restrictions for institutions . It certainly sounded fair. Taxpayer money for failed banks will result in limits to failed executive compensation. However, a problem becomes apparent when we look at the actual details and beyond the political sound bite.

An overview of the executive salary cap from this article in Bloomberg:

Executives at Goldman Sachs Group Inc., JPMorgan Chase & Co. and hundreds of financial institutions receiving federal aid are not likely to be affected by pay restrictions announced yesterday by President Barack Obama. The rules, created in response to growing public anger about the record bonuses the financial industry doled out last year, will apply only to top executives at companies that need “exceptional” assistance in the future. The limits are not retroactive, meaning firms that have already taken government money won’t be subject to the restrictions unless they have to come back for more.

So, all the tarp money already spend will be given without any restriction to executive pay. As a result, it won't apply to the executives of the hundreds of financial services firms that have already taken TARP money. It does not even apply to the worst offenders like AIG, Merrill Lynch and Citigroup that have already come back twice to take government capital.

The new financial services executive salary cap will only effect institutions in the future that need financial assistance. It will only serve to preclude some better run banks from getting government assistance.

Style over substance is the reality of this announcement. The Executive Salary Cap is really a political ad given to assuage an outraged voter base. It is a policy that currently has a lot more political bark than regulatory bite.