The Ultimate Harm of the Pay Czar

The Pay Czar has announced new plans to cut compensation for employees below the top layer of management, the so called "second tier" employees.  The ostensible toughness of the Pay Czar is generally overstated.  Moreover, his impact is a short term palliative that will have no long term effects.  

Sometimes reports indicate that the Pay Czar has cut compensation when in fact he's allowed for an increase in compensation but only cut the salary component.  Thus, published reports indicated that BofA had trimmed the pay of the CFO, Joe Price, to $500,000 because of pressure from the Pay Czar.   Its true that Price had been paid $800,000 in salary the year before.  But his "total compensation" package in 2008 was $4,021,168 (based on the total compensation line for the 2008 proxy statement).  His total compensation for 2009?  Cash of $500,000 (beginning on Nov. 1, 2009) and stock related awards of $5,250,000.  Moreover, as the BofA noted, "Salary Stock Units are paid in cash" and some payments are accelerated if the Company repays its TARP funds.   

Then there was the much discussed effort by the Pay Czar to cut compensation back in October.  Note that the stories emphasized the cut of somewhere around 50% in the compensation of top officials.  Yet one analysis by the WSJ showed that 14 officials at Citigroup still could receive over $5 million (in salary and stock) and six could receive more than $8 million in salary and stock.

In short, the Pay Czar has sometimes lowered compensation amounts, although still allowing for large pay packages.  He has forced the seven companies subject to his oversight to shift large portions of compensation from cash to stock and options.  Yet even this modest approach has been too much for at least some of the seven companies.  They are seeking to get out from underneath the Pay Czar's oversight by paying back TARP funds. Once the funds are repaid, even these modest limits will no longer be required. 

And that, in the end, raises questions about the value of the Pay Czar.  He unquestionably showed the weakness in current system of determining compensation.  Even in an era of financial crisis and government bailouts, he still had to lower the compensation approved by the boards of the companies subject to his oversight.

Yet his oversight ultimately was likely negative.  It likely accelerated the payback of government funds, something that may not be beneficial to the financial system.  Moreover, the short term limits probably caused some talented employees to go elsewhere, weakening these financial institutions.  

These costs cannot be balanced against any concomitant benefits because there are none.  The compensation process remains broken.  The Pay Czar has provided no long term fix.  Moreover, as the Goldman example seems to show, once free of government restrictions, compensation amounts escalate upward.  Once the Pay Czar fades from the scene, the harm will still be there but the benefits will not.