The Unintended Consequences of Salary Caps

In early February when President Obama announced his plan to cap executives’ salaries at companies receiving bailout funds, the reaction was sharply divided amongst conservatives and libertarians, even on this very blog. Supporters of the cap argued that it’s bad enough to see precious taxpayer dollars irresponsibly used to fund bailouts, but that directing this money toward “excessive” executive salaries and bonuses would be particularly egregious. Opponents warned that this type of misguided regulation would drive away competent workers to firms who are not dependent on government funds and are not burdened by the many “strings” attached to them, which in turn would harm the taxpayer — liable for these companies’ losses — even more.

An article published in The New York Times over the weekend seems to confirm the latter viewpoint:

Top bankers have been leaving Goldman Sachs, Morgan Stanley, Citigroup and others in rising numbers to join banks that do not face tighter regulation, including foreign banks, or start-up companies eager to build themselves into tomorrow’s financial powerhouses…This is certainly a concern for the banks losing top talent…

Sensing a shifting tide, talented bankers who fear a dimmer future at banks that have taken taxpayer money are migrating to brash boutique firms like Aladdin, which are intent on proving their critics wrong by chasing fast profits and growth in hopes of one day rising up as challengers to the old guard.

[Smaller banks] see a rare chance to upgrade talent and standing on Wall Street — and globally — by luring top minds who would not have considered moving from a Goldman Sachs or a Morgan Stanley in flush times. Now that their rivals must accept compensation limits and other restrictions that come with the use of taxpayer support, the foreign banks are finding more eager takers…

While we may agree that bailouts and TARP are fundamentally bad policies, I would argue that we must remember that the taxpayer at large now has a direct interest in seeing these companies succeed so that his money does not completely go to waste. Implementing excessive regulations that discourage talented workers from staying on is a sure way to guarantee no return on this bailout money.

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