Can you work for $500,000 a year?

That is the question being asked to many top executives of financial institutions tonight. President Obama made the declaration today in response to public outcry over companies that received billions in federal aid, just to turn around and give their CEO’s and management multi-million dollar salaries and bonuses.

For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis isn’t just bad taste — it’s a bad strategy — and I will not tolerate it. We’re going to be demanding some restraint in exchange for federal aid — so that when firms seek new federal dollars, we won’t find them up to the same old tricks. – President Obama

Before I get too far into this, let me state that I do think that companies who choose to accept federal aid should be subject to pay limitations. With that said, I fear that Obama’s statement of “I will not tolerate … the same old tricks” could lead to additional policy and maybe legislation down the road where the government begins to intervene with companies not seeking federal aid but pay their top management large salaries.

The call for capping salaries at $500,000 might result in lawsuits by both the individual employee and the company itself, since most of these salaries are a part of a written agreement or contract. Also, the impacted leadership might decide to leave the company prematurely, seeking jobs at companies not currently accepting federal funds, leaving the struggling company without any experience in the top tiers.

So what could we do? While we can legislate how companies should compensate their leadership (including board members), companies would lose their independence from the federal government; an aspect that has made our economy and market one of the best in the nation. Instead, we should encourage companies to fix top management’s pay to the performance of the company’s balance sheet. You can start with a base salary, and then increase or decrease the salary in response to the percentage increase or decrease of the company’s bottom line. For example:

- CEO is hired for $2,000,000 annually.
- In the first year, the company’s bottom line increased by 8%, so the CEO’s salary increases to $2,160,000.
- In the second year, the bottom line increased by only 2%. The CEO’s salary increases to $2,203,200.
- In the third year, the company loses money, coming in 3% below last year. The CEO’s salary decreases to $2,137,104 accordingly.

While this is a simple example, it highlights how the CEO has a personal interest in the performance of his/her company. This way, CEO’s such as Chrysler’s Robert Nardelli, might be more willing to make the tough decisions to shut down factories, fight the power the Union’s have over his company, or even sell the company airplane. By taking these actions earlier, they might not need to ask the taxpayers for assistance.

It will be up to the leadership to make such changes to their financial compensation packages. In any other year, such changes might not happen, but in the current economic environment the companies might do so in order to regain the trust of the shareholders and the market in general. The question is, will they do it?

Related articles:
Political Animal – “Obama Announces Cap on Executives’ Pay”
CNN – “Obama sets executive pay limits”
Fortune – “Obama’s pay plan doesn’t go far enough”
MLoger - “McCaskill’s Idiotic Red Herring Executive Compensation Bill”
Open Congress Blog – “Obama to Set Executive Pay Cap”