Fed announces rulings on pay limits

From the WSJ:

The central bank moved to incorporate reviews of compensation into its routine regulatory process, a step that will affect large and small financial firms across the U.S. as well as American subsidiaries of non-U.S. financial companies.

As expected, Treasury official Kenneth Feinberg said cash salaries paid to the highest-earning executives at seven companies getting exceptional federal aid will be capped at $500,000, while the group’s total pay level, annualized, will be 50% lower than a year before.

The rulings will be effective for just November and December; employees won’t have to repay salaries already received. But the rulings will become the starting point for next year’s salary figures and until the companies repay their government aid.

The 7 institutions that will be hit by the ruling are: BofA, Citi, GMAC, AIG, GM, Chrysler Group, and Chrysler Financial.

In the report, there was one line though that struck me most.

The Fed also proposed that pay of traders and other employees be linked to the risks taken to achieve returns. So if two people generate $1 million in revenue each, one who took more chances could be paid less.

What the hell happened to higher risk, higher return? Sure that brings out the animal spirit among many traders, but seriously this is completely the wrong way to solve the problem. This would basically kill investment returns for many as traders who would apparently want to be paid more would just decide to take less risk – potentially hurting their clients’ investments.

The ruling does two things: one, it would only encourage traders/bankers to find a way to raise their pay, without being subject to the scrutiny of the Fed and two, I just don’t believe limiting compensation is the right way to go – if at all necessary.

Source: WSJ

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