Obama's Salary Cap Could Seriously Hurt New York
$500,000 Cap Set For Executives Who Work At Institutions That Get Substantial Taxpayer Money Bailout
Expert Says Limit Will Lead To Critical Brain Drain For New York City, State
Marcia Kramer NEW YORK (CBS) ―
President Obama's Wall Street salary cap may be well intentioned and it certainly taps into public sentiment, but it's a killer for New York.
"Without the talent of Wall Street to bring us back into a position of leadership in the global economy, we're going to be in bad shape as a world economic power," said Kathryn Wilde of the Partnership for New York.
Wylde says the Obama salary cap will lead to a critical brain drain – China and the United Arab Emirates have already come to poach Wall Street talent. She also says lower salaries in the financial industry will mean dramatically lower tax revenues for the city and state.
"We also depend heavily on the financial services industry to fund our economy and our tax rolls," said Wylde. "Last year 20 percent of our income taxes in the states – 12 percent in New York City came from Wall Street."
Public sentiment among Wall Street employees and local politicians is with the president.
"I'm more concerned about, again, the obscene salaries being paid by companies that are getting federal money and what that was doing to consumer confidence," said Rep. Peter King (R-Long Island.).
And that feeling dominated among those CBS 2 randomly spoke with on city streets.
"Given the current environment, I think it makes sense. In the longer term it won't last, but for now, I complete agree with it," said Bob Leverich, a Chatham, N.J. resident.
"I think that honestly it's more of a responsible way of handling what's happening in the economy right now based on people's years of mismanagement," said Colts Neck N.J. resident Anthony Wagar.
Experts said that the President's actions will make it more difficult for both New York City and New York state to come out of the recession.
In addition to a salary cap, President Obama said bonuses should be limited to stock shares, which can't be collected until federal loans are paid back.
Obama announced the dramatic new government intervention into corporate America at the White House, with Treasury Secretary Timothy Geithner at his side. The president said the executive-pay limits are a first step, to be followed by the unveiling next week of a sweeping new framework for spending what remains of the $700 billion financial industry bailout that Congress created last year.
The executive-pay move comes amid a national outcry over huge bonuses to executives heading companies seeking taxpayer dollars to remain afloat. The demand for limits was reinforced by revelations that Wall Street firms paid more than $18 billion in bonuses in 2008 even amid the economic downturn and the massive infusion of taxpayer dollars.
"This is America. We don't disparage wealth. We don't begrudge anybody for achieving success," Obama said. "But what gets people upset -- and rightfully so -- are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers."
The pay cap would apply to institutions that negotiate agreements with the Treasury Department for "exceptional assistance" in the future. The restriction would not apply to such firms as American International Group Inc., Bank of America Corp., and Citigroup Inc., that already have received such help.
"There is a deep sense across the country that those who were not ... responsible for this crisis are bearing a greater burden than those who were," Geithner said.
Firms that want to pay executives above the $500,000 threshold would have to use stock that could not be sold or liquidated until they pay back the government funds.
Generally healthy institutions would have more leeway. They also face the $500,000 limit if they're getting government help, but the cap can be waived with full public disclosure and a nonbinding shareholder vote.
Obama said that massive severance packages for executives who leave failing firms are also going to be eliminated. "We're taking the air out of golden parachutes," he said.
The proposal comes after it was revealed that Wells Fargo & Co. canceled a pricey Las Vegas casino junket for employees after a torrent of criticism that it was misusing $25 billion in taxpayer bailout money.
The company initially defended the trip after The Associated Press reported it had booked 12 nights at two of the city's most expensive hotels. But within hours, investigators and lawmakers on Capitol Hill had scorned the bank, and the company canceled.
President Obama reacted angrily last week to reports that banks gave more than $18 billion of bonuses at a time when they were relying on taxpayer money for their survival, calling such bonuses "shameful," and deeming them "the height of irresponsibility."
Other new requirements on "exceptional assistance" will include:
- The expansion to 20, from five, the number of executives who would face reduced bonuses and incentives if they are found to have knowingly provided inaccurate information related to company financial statements or performance measurements.
- An increase in the ban on golden parachutes from a firm's top five senior executives to its top 10. The next 25 would be prohibited from golden parachutes that exceed one year's compensation.
- A requirement that boards of directors adopt policies on spending such as corporate jets, renovations and entertainment.
The administration also will propose long-term compensation restrictions even for companies that don't receive government assistance, Obama said.
Those proposals include:
- Requiring top executives at financial institutions to hold stock for several years before they can cash out.
- Requiring nonbinding "say on pay" resolutions -- that is, giving shareholders more say on executive compensation.
- A Treasury-sponsored conference on a long-term overhaul of executive compensation.
Top officials at companies that have received money from the government's Troubled Asset Relief Program already face some compensation limits.
And compensation experts in the private sector have warned that such an intrusion into the internal decisions of financial institutions could discourage participation in the rescue program and slow down the financial sector's recovery. They also argue that it could set a precedent for government regulation that undermines performance-based pay.
"It's not a government takeover," Obama stressed in an interview Tuesday with CNN. "Private enterprise will still be taking place. But people will be accountable and responsible."
Still, some elected officials were pushing for the stricter caps.
Sen. Claire McCaskill, D-Mo., has proposed that no employee of an institution that receives money under the $700 billion federal bailout can receive more than $400,000 in total compensation until it pays the money back. Her figure is equivalent to the salary of the president of the United States.
Even some Republicans, angered by company decisions to pay bonuses and buy airplanes while receiving government help, have few qualms about restrictions.
"In ordinary situations where the taxpayers' money is not involved, we shouldn't set executive pay," said Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee.
"But where you've got federal money involved, taxpayers' money involved, TARP money involved, and the way they have spent it, with no accountability, is getting close to being criminal."
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