Opinion in the United States has turned so fiercely against financial firms that the administration’s new recovery plan is in jeopardy. The country is in a severe and still-worsening recession brought on by financial incompetence and outright malfeasance; the public cost of relieving failed banks runs into hundreds of billions of dollars. Yet banks pay tens of billions in bonuses, buy new corporate jets, and lavishly furnish their executives’ offices – or so the public perceives. Rage is not too strong a word for the public response.

Curbs on executive pay for firms seeking taxpayer assistance, such as those the Obama administration has announced, were therefore a political necessity. The administration proposes a $500,000 ceiling on pay at firms receiving further government support. Extra pay in the form of restricted stock or linked in other ways to long-term performance will apparently be allowed.

One cannot quarrel with the calculation. A vast new plan to stabilise the financial system is urgently needed. Resistance to it, fuelled by disgust at the idea of new handouts to Wall Street, is intense. The industry’s disdain for public opinion and evident inability under the direst of circumstances to exercise restraint – “shameful” was the president’s word – has added mightily to the political challenge. The administration had little choice.

Yet the measure has risks and drawbacks, as officials are well aware. If it discourages firms from seeking timely help, it may backfire. If the curbs are kept in place too long, retaining and recruiting people with the skills and the prodigious appetite for work that economic recovery will require may start to become difficult.

Eventually, having taken responsibility for setting pay in distressed financial institutions, the government will have to explain itself when it steps back. If the market has failed this time, why should one expect it to work in future? And if the market for financial talent has failed, as the administration has declared, what confidence can one have that the market for other kinds is functioning tolerably well? Might this initiative, whether the administration intends it or not, be the thin end of the wedge?

In a way, it should be. Prevailing pay systems in finance have encouraged excessive risk-taking. US shareholders should be given more clout in influencing what their managers receive. To be sure, arbitrary caps – politically necessary in the present case – can have no place in those longer-term reforms. But it is not too soon to start thinking about what those reforms should be.

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