Why Capping Pay is Likely to Work

The NYT wheels out an executive-compensation expert today, to predictably pour cold water on the Obama administration’s plans to cap top executives’ pay at half a million bucks a year:

“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”

Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits will make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms.

“It would be really tough to get people to staff” companies that are forced to impose these limits, he said. “I don’t think this will work.”

I can’t wait for Reda’s assertion to be empirically tested; my guess is that there is no shortage of people willing to run massive, multi-billion-dollar companies no matter what the pay.

There might be problems in hiring top talent, over the long term, if no one in the company is going to make more than $500,000. But that’s not what’s going on: for one thing, these salary restrictions are explicitly temporary, and for another, they don’t apply to more junior employees.

It’s also astonishingly tone-deaf for anybody, in this climate, to say that "$500,000 is not a lot of money". I’m sorry, but it is a lot of money. (And it’s 25% more than the president makes.) What’s more, all of these executives are dynastically wealthy already: they don’t need an annual salary to live in splendor. Their paycheck is basically just a way to compete.

Could the likes of Vikram Pandit and Ken Lewis "earn more money at other firms"? If so, all power to them, no one’s going to be particularly sad to see them go. But my guess is that if they do go, it’ll be because they’re pushed, and not because anybody’s waving a massive paycheck at them.

It’s conceivable that Reda is right, and that there won’t be anybody willing to do these jobs for $500k. But I very much doubt it — especially given the fact that as soon as the government is paid back, salaries will immediately bounce straight back up again. The net present value of a CEO’s job is still enormous, no matter what the annual paycheck.