Obama’s cap on CEO pay strives to end era of excess

The new pay cap for some of America’s top bankers is rooted in the short-term exigencies of a government bailout, but it also may signal a turning point that affects executive pay for years to come.

On Wednesday, President Obama put a $500,000 limit on annual pay of bank executives whose firms receive government assistance during the financial crisis.

But he also said the new guidelines are “only the beginning of a long-term effort” to realign the way business leaders are paid, beyond the banking industry and other firms getting bailouts.

The announcement comes at a time of public anger about the meltdown of a once-strong financial industry, and as the Obama administration is about to unveil additional bank-rescue plans that are likely to cost taxpayers more than the $700 billion already allocated by Congress.

It also comes as many investors and financial executives say that reformed pay practices need to be part of any long-term solution for the industry’s problems.

“There is a serious problem with compensation [in the financial sector],” says Charles Elson, director of the University of Delaware’s Center for Corporate Governance. Top bankers “convinced the world that they were the smartest human beings on the face of the earth…. It turns out they weren’t all that smart.”

The financial sector has moved to the forefront of the long-simmering national debate over executive compensation, largely because it is receiving the greatest government assistance. But what happens in that industry could set trends that will affect others.

The big question now may not be whether executive pay practices will change, but how.

Mr. Elson, echoing the view of many experts on corporate governance, says the best way forward is for corporate boards of directors to take the lead, rather than having the matter legislated by Washington.

“The quick populist fix sounds great, looks nice on television,” he says. But “the solution is better boards.”

Obama's pay rules focus on any firms that seek and receive future help from government, with a firm cap on those getting "exceptional" assistance. Citigroup and Bank of America among the few examples of firms so far that have received targeted support that would cross the threshold to be called "exceptional." But the new rules will not be applied retroactively. [Editor's note: The original version did not make clear that the pay caps only applied to future help.]

“This is America. We don’t disparage wealth. And we believe that success should be rewarded,” Obama said. “But what gets people upset – and rightfully so – are executives being rewarded for failure. Especially when those rewards are subsidized by US taxpayers.”

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