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Brian and Matt both argue that the executive pay limits proposed by the Democrats are an important piece of the bailout bill. In essence, they say that limiting executive compensation is an elegant way of mitigating the moral hazard in the process: Executives who want a bailout must first agree to cut their own compensation, which will reduce their incentive to take money they don't need. That's possible, but it's hard to imagine the effect as anything aside from extremely weak. Brian seems to be positing something akin to the government pay scale, but there's nothing suggesting such sharp limits in Dodd's legislation. This is the section:
SEC. 17. EXECUTIVE COMPENSATION.The Secretary shall require that all entities seeking to sell assets through a program established under this Act meet appropriate standards for executive compensation and shareholder disclosure in order to be eligible, which standards shall include— (1) limits on compensation to exclude incentives for executives to take risks that the Secretary deems to be inappropriate or excessive; (2) a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate; and (3) such limitations on the entity paying severance compensation to its senior executives as are determined to be appropriate in the public interest in light of the assistance being given to the entity.As far as I can tell, this is less a limit on compensation than a restructuring of it: It's pay-for-performance. It seems to disincentivize risk, reduce compensation in response to losses, and constrain severance pay. This is a moderate limit at best. John McCain has proposed a cap on executive pay equal to that of the highest paid government officer (the president, $400,000), which would certainly be stronger than Dodd's offering, but I'd be surprised to see Dodd adopt his proposal.Even if he did, my hunch is the effect would remain modest. The limits on pay would not be eternal, and an executive who entered into the contract and presided over the resuscitation of his company could expect better future earnings than an executive who let his firm collapse. Even so, I like the inclusion of CEO pay limits as a symbolic measure. I like it as a substantive measure, minor though it might be. And there's a possibility that they could exert some influence on moral hazard. But my concern is different. Because limits poll highly, Democrats have elevated them to a central role in the fight. That's fine, too. They need political chips. But the concern is that Democrats don't achieve the major concessions that would better this plan -- equity stakes, help for homeowners -- but blink before they let the bailout die. Having achieved an obvious win by instituting a bipartisan oversight commission and a popular win with some sort of CEO pay limit (which even McCain supports), they declare victory. But CEO pay limits are not enough. They're a high profile addition to the package, but substantively quite minor, particularly as currently composed. On their own, they cannot be allowed to be defined as a win.
