Obama cuts pay of bailed-out bosses - will UK follow suit?

President Obama has told top execs of taxpayer-rescued firms to expect pay cuts of up to 90%. Ouch!

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Last Updated: 31 Aug 2010

In a move that is likely to send ripples of anxiety speeding across the pond toward London, Obama has hit the most senior 25 employees at Citigroup, Bank of America, American International Group (AIG), GM and Chrysler right where it hurts: in the wallet. No wonder the famously well-remunerated Bob Diamond wasn’t interested in the BoA job, as we reported earlier this week.

Until their firms have paid off the billions of dollars of state aid they have received in recent months, the unfortunate top brass of these companies will receive much reduced bonuses, and basic pay slashed to a mere 10% of previous levels. The overall impact of the measures is expected to be an average reduction in take home pay of 50%, but some will see their earnings slashed by an eye-watering 90%.

The only sliver of comfort that these bosses can take is that some of their ‘lost’ cash will be set aside for them in the form of share allocations – but these will remain inaccessible for several years. 

The stated aim is to ‘align’ the personal self-interest of bosses with the long-term needs of the company. A laudable goal but one which is notoriously difficult to achieve by any means, never mind these rather crude proposals.

But there is also the question of appeasing the public to be considered, always at the front of any politician’s mind. On that score, no-one can accuse the US leader of not putting put his money where his mouth is, although whether he will end up wishing that he had been rather less forthright remains to be seen. This announcement will certainly make him a lot of powerful enemies, and not just on Wall Street.

In a final stab at what looks rather like trying to make these ‘named and shamed’ bosses eat a very public portion of humble pie, they will also have to seek express government permission for perks of over $25,000 apiece. So private planes, that coveted country club membership and even the S-Class Merc may have to be foregone or bought out of taxed income. That’s got to hurt.

That’s enough about over there, what about over here? This week has seen London bankers pay firmly back in the spotlight, with everyone from Bank of England governor Mervyn King through Alastair Darling and Lord Myners giving these greedy City types a very stern talking to about their bulging bonus pots.

'Can’t you at least wait until the recovery has begun/the housing market improves/ the election is over?' was what most of their chatter amounted to. Rather like asking a lion to stop eating zebras or a scorpion to put its sting away, and about as likely to yield results.

The fundamental problem here is that, all other things being equal, companies should really be free to set their employees pay as they see fit. It’s not always pretty to watch, but that’s capitalism. Of course, when firms which have taken taxpayer bailouts then pay big bonuses, all other things are not equal – and that’s when public outrage starts to sway politicians’ hands.

But attempts to cap remuneration centrally – especially in such an arbitrary way as the US is proposing – distort the market so badly that they may well do more harm than good. If bosses don’t set a good example and moderate themselves, it is very hard for anyone else to do it for them. It’s a poser alright.

 

In today's bulletin:

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Obama cuts pay of bailed-out bosses - will UK follow suit?
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