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Who’s Afraid Of The Executive Salary Cap?

Thursday, 25 Sep 2008 | 11:16 AM ET

While Treasury Secretary Hank Paulson fought to push his original 42-page, $700 billion bailout proposal through Congress—which became as difficult to do as forcing a two-humped mammal through the eye of a needle—politicians on both sides of the floor suggested some minor edits.

Those edits included restricting CEO compensation at the banks the Fed plans to bail out. Paulson initially insisted that these restrictions (such as removing incentives for taking “inappropriate or excessive risks” and limiting severance pay) be left off the bill, but he later relented, agreeing yesterday that they should be included.

It’s no surprise that it was tough to sell Congress on allowing CEOs wanting federal assistance to keep their multimillion-dollar pay packages intact, especially since the current state of these packages—particularly the part about huge incentives for short-term trading gains that helped folks like Lehman Brothers’ Dick Fuld pull down $22 million last year—were largely responsible for hauling American taxpayers into this mess.

And now that it appears that salary restrictions will be included on the bill (it’s still unclear which ones will make it on there), many bankers on Wall Street (what’s left of it, that is) are wondering how this will affect their compensation.

Irrespective of the bailout’s provisions, given the slow deal market, bankers throughout the industry will certainly receive much lighter bonuses this year versus last. And with the market expected to remain dry through 2009, bonuses next year won’t look much better.

In addition, higher-ups serving under CEOs at firms taking advantage of the federal bailout could see their bonuses moving even further south as a result of federal restrictions—as chiefs’ compensation packages decrease, they’ll not look kindly on members of their tribe taking home fatter checks than them.

Bankers outside the bailout’s footprint could also see their bonuses slide. Any restrictions signed by Congress could become industry standard practice, particularly for public companies relying on their shareholders’ faith in them, putting chief executives (and thus their underlings) outside the bailout’s print in a similar position as those inside.

Meanwhile, salaries, typically a pittance in comparison with bonus checks, should remain where they are across the industry. But this is little solace for Wall Street insiders, who joined the investment banking ranks not for the low-six-figure salaries but for the possibility of the seven-figure annual payouts, whose days now appear to be numbered.

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Derek Loosvelt is Vault.com’s global finance editor. He has a BS in economics from the Wharton School at the University of Pennsylvania and an MFA in creative writing from The New School. He is a writer and editor and has worked for Brill’s Content and Inside.com. Previously, he worked in investment banking at CIBC and Duff & Phelps.

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