Limiting executive pay after bailouts


Here is a look at the history of limiting paychecks after a bailout…not such a promising outlook for those wanting to do so.

Tax History Project

Too Much: The Historical Link Between Bailouts and Pay Caps
Date: Oct. 6, 2008

Full Text Published by Tax AnalystsTM

by Joseph J. Thorndike

Complaints about outsized executive pay have prompted Congress to include compensation limits in the recently passed Wall Street bailout measure. Are the limits a good idea? Maybe. Will it work? If history is any guide, probably not.

In dollar terms, executive compensation is trivial. Even the huge paychecks common on Wall Street shrink to insignificance when compared to the size of the proposed bailout (or the liabilities of financial firms now in peril). To be sure, some compensation schemes reward short-term profit at the expense of long-term prudence. But the most salient arguments for executive pay caps — at least in the political arena — are moral, not practical.

Complaints about outsized paychecks have been a recurring feature of American politics. Sometimes, populist indignation has led to legislative action. But rarely have pay limits had the desired effect. Why else would we keep having the same arguments over and over again?

Still, it can be instructive to revisit past arguments, if only to appreciate current possibilities. In particular, we might look to the early 1930s (isn’t everyone these days?). In those early years of the Depression, lawmakers tried to cap pay at companies seeking handouts from the Reconstruction Finance Corporation (RFC), a federal agency created to stabilize markets and rescue ailing banks. Sound familiar?

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