Public Passion Drives Pay Czar to Arbitrarily Slash 175 Top Salaries

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Includes: AIG, BAC, C
by: Vincent Fernando, CFA

Kenneth Feinberg, the American pay czar, is slashing cash salaries for top employees in companies like Citi (NYSE:C), Bank of America (NYSE:BAC), and AIG by 90% on average, according to the WSJ. This will make these firms far less appealing to future talent, and one has to imagine that a lot of these top people must be polishing their resumes. A 90% cut means you can make 10x more, in terms of cash salary, somewhere else. (To be fair, note that Mr. Feinberg is shifting compensation towards other forms such as locked up stock options, thus total compensation isn't technically being cut 90%)

The problem here is that these cuts are clearly driven by public passions, not by economic logic. Salaries aren't threatening the stability of these companies - proper management going forward is. Sure, much of top management has been asleep at the wheel, but if you only offer tiny salaries going forward (on a relative basis to what these guys can make), then don't expect the best and the brightest.

This is rear-view mirror driving. Salary cuts are meted out as a sort of punishment, and to quell public anger, yet their future effects are not considered. It's not about whether or not some of these people made horrible mistakes in the past, but whether or not you'll attract the right people going forward for these companies. If I were a Citi shareholder for example, I'd be angry at this decision. Capping salaries makes the company less competitive.

It's also a sad state when business leaders are increasingly required to buddy up in Washington, lest they fall victim to a rather arbitrary decision from this single man, Mr. Feinberg.

Still, there are a few good things coming out of the pay czar's actions - though these are issues that can be solved in far less authoritarian ways:

Mr. Feinberg will also demand a series of corporate governance changes at the firms, including splitting the chairman and CEO positions, requiring boards of directors to create "risk" committees and eliminate staggered board elections, which critics charge inhibit change.