OOTS News has covered the federal government’s attempts to control executive pay before, when regulations limiting executive pay and bonuses began to be imposed on banks that received TARP funds. While it appears reasonable to monitor executive pay to companies receiving taxpayer funds through TARP, I cautioned then that the efforts to control executive pay were a slippery slope that would likely expand in the future. Under the Dodd-Frank Act, the FDIC has begun to expand these efforts.
“The Federal Deposit Insurance Corp.’s board of directors meets Monday to vote on a proposed rule to limit executive pay and a final rule to impose higher fees on bigger lenders, the agency said today.
The board has been considering new rules to ban pay practices that encourage what regulators consider excessive risk-taking. The rules, required under the U.S. Dodd-Frank financial overhaul law which was enacted in July, are expected to require more deferred compensation for bank executives.”
Like many of the regulations under Dodd-Frank, the FDIC’s proposed limits on executive pay have a laudable goal: limiting excessive risk taking. However, like much of Dodd-Frank there are unintended consequences of these efforts. When pay is determined by government mandate and not the market, the ability to attract highly skilled candidates is hindered. The financial system needs talented leaders to keep the economy rolling, while many mistakes have been made on Wall Street in the last year, handing the reins to Washington is not the answer.
This intervention into the private market by government could have a chilling effect on business, with executives less willing to take even necessary risks involved in business for fear of having their pay slashed. While these measures are not the Soviet Russia command style efforts some critics may claim them to be, regulators need to be careful and not create a talent drain on Wall Street.