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Could bailout's pay caps launch Wall Street trend?

Some see the beginning of the end for huge compensation for financial titans. Others say the limits are too weak to bring real change.

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IPS favors a lid on CEO pay set at 25 times the pay of a bailed-out company's lowest-paid worker. The current top federal paycheck – the president's $400,000 annual compensation – represents about 25 times the pay of the US government's lowest-paid employee.

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Financial executives, for their part, say most of their compensation is at risk because it is tied to the firm's performance in the stock market. In testimony this May before a congressional committee, Merrill Lynch's Mr. O'Neal defended his payout. "When the business does well, all shareholders do well. But if the business does not do well, the value of the compensation can plummet."

Indeed, O'Neal's net worth in Merrill Lynch stock has plunged from $127.7 million in January 2007 to $40.2 million, according to a Sept. 21 New York Times report.

Are financial executives being singled out for pay limits because of the strong anti-Wall Street sentiment on Main Street? Some suggest that bias plays a role.

"If we put caps on compensation to anyone benefiting from government subsidies or funds, that could affect almost anyone in the private sector," says James Barth, a senior finance fellow at the Milken Institute in Santa Monica, Calif.

Compensation watcher Graef Crystal wonders where the government draws the line. "Everyone is on the dole," he says. "Take the solar industry, for example. The whole industry is subsidized."

The same is true for farmers, aerospace companies, and, soon perhaps, the automobile industry, which is looking for $25 billion in government funding, Mr. Crystal says. "It's hard to see any industry that has not been affected" by reason of receiving government help.

Yes, Wall Street is among the highest-paid industries – whether those companies have had good years or bad ones, says Crystal. (Editor's note: The original version included an account of a conversation between Mr. Crystal and John Gutfreund, former CEO of the investment bank Salomon Brothers, about the importance of not letting pay drop on Wall Street. The original story reported Mr. Gutfreund's denial that the conversation ever took place. After the story was published, Crystal contacted the Monitor to say the conversation did not happen as reported.)

Doubts abound as to whether any pay curb will be effective, because executives are likely to find a way around it.

"These are the most clever people when it comes to writing financial contracts," says Doug Elmendorf, a senior fellow at the Brookings Institution in Washington. "They will hire people to figure out how to get around it."

Mayra Rodriguez Valladares, who runs training sessions on complex financial products on Wall Street, says a lot of anger can be found inside Wall Street firms themselves. "There are a lot of people who work for these firms who don't even make $50,000 or $60,000 a year, and they are angry, too," says Ms. Valladares, a principal in MRV Associates.

Some executives who don't want to take pay cuts may opt to go to private equity firms or hedge funds that are not involved in the rescue plan.

"The most knowledgeable executives will go to where the best jobs are. They might not go to these troubled companies anyway," says Mr. Challenger.

If the CEOs at troubled banks have a choice of participating in the government's plan or watching their company go out of business, he says, the decision is easy. "You save the company and all the people," he says.