Salary Caps: Are Bankers Just The Start?

By Lisa Smith | September 18, 2009 AAA



The United States is leading the charge to reign in banker's pay. A proposal is in the works to discourage the type of risk-taking that created the current global financial mess by putting limits on bankers' pay. France and Germany are seeking caps too, suggesting that bonuses be capped at a percentage of profits.

Push for Limits
The push for pay limits comes as the banking and financial services industries bear the brunt of the blame for the greed-driven practices that pushed the world economy into recession even as their chief executives continued to enjoy extraordinary pay packages, lavish perks, and stunning bonuses.

Former Federal Reserve Chairman Paul A. Volcker highlighted the issue with his recent comment that the financial crisis was partially caused by "compensation practices that provided enormous incentives to take risks." The practice of giving out loans to borrowers that clearly couldn't afford to repay them and repackaging the debt into complex securities that were then sold to greedy investors that didn't understand what they were buying fall into that category. (Learn more in Who Is To Blame For The Subprime Crisis?)

Profiting from Failure
The nation's top banks are of particular concern, as The New York Times reports that three banks that reached deep into taxpayers' pockets and came away flush with funds from the Troubled Asset Relief Program (TARP) boast CEOs on the 2008 list of top-paid executives. Vikram Pandit, CEO of Citigroup; Ken Lewis, CEO of Bank of America; and Richard D. Fairbank, CEO of Capital One Financial continued to rake in the money for their personal portfolios even as their shareholders suffered, employees were downsized, the economy fell to ruin, and taxpayers covered the cost. Lewis was finally forced out in disgrace, but will still take home tens of millions in retirement pay, unlike the 30,000+ people who lost their jobs when Lewis orchestrated the takeover of Merrill Lynch without fully disclosing the extent of Lynch's financial problems.

Similar Case in Auto Industry
The carmakers in Detroit fall into the same camp. Entire neighborhoods are being abandoned by the unemployed as the former Big Three continue to crumble, yet the leaders of these failing firms flew to Washington in private jets to fill their pockets with taxpayers money. The disparity is further highlighted by numbers from the AFL-CIO that peg the average total compensation for CEOs at $10.4 million in 2008, with a median salary of $7.7 million and perks of $336,248. The average worker on the other hand earned $37,544 in 2008 according to the Federal Bureau of Labor Statistics. (Learn more in The Fall Of The Market In The Fall Of 2008.)

Wide-Reaching Reform?
With unemployment in the U.S. hovering just below the 10% mark and unemployment in other nations well into the double digits, the entire world is angry at results of capitalism run amok. Even the usual chorus of critics on the right is having a hard time arguing against reform.

The question now is how far will the reforms spread? If bankers are regulated, what about the CEOs of publicly traded firms that saw their stock prices fall by 50% while the CEOs kept getting paid? Should the government step in and set pay limits there too?

How about a novel idea: pay for performance. If the stock price goes up, the CEO gets a percentage of the gains. If it falls, the CEO heads to the unemployment line along with the rest of the company's workforce. If we're going to level the playing field, let's take into the account the toll on workers and their families when the greed of a few result in misery for many. (For more, check out our Credit Crisis Tutorial.)

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