Sunday, February 22, 2009

Democrats vs. incentives, II

Earlier we blogged about the Democrats' hostility to incentives (at least those in the private sector) manifest in the recent policy proposals. Now we learn that the last twelve pages of the stimulus bill contain make it illegal for banks receiving TARP funds to pay incentives.
...The rules prohibit any incentive compensation of any kind — bonus, commission, whatever — unless it is paid in restricted stock that doesn't vest until the TARP money is paid back to the government. And the amount of the restricted stock is limited to 50% of your salary. So if you make $200,000 a year, the most you can get in restricted stock is $100,000.

Typically, highly compensated people on Wall Street earn fairly low salaries, but then get large annual bonuses — usually based on performance. Title VII turns that upside down. No more pay for play. It's all about salary now. So if a bank normally pays a superstar trader a nominal salary of $200,000 — and in a home-run year he earns himself a $10 million bonus — the only way to pay him the same total amount is to raise his salary to about $6.6 million. He'd then get that salary even if he did a lousy job in a given year.


  1. Hostility toward incentives??

    Maybe the Dems actually understand this much better than you think. If I am a CEO and want to pay myself a huge bonus, I have a really big incentive to pay the government back their (our) money.

  2. Looks like the law of Unintended Consequences again, the high comp individuals will likely see base and even total comp increase due to a misguided effort to target the TARP punishment at them.

  3. Hopefully if they do a lousy job, they will be moved to a higher value use. If the firms do not wish to have their hands tied by government regulations, they should not accept government bailouts. Maybe we could consider these loan covenants. Sound fair?