Michael Kinsley on the feeble banker's arguments for limiting pay. Can't they do better than that?

Banking for Dummies

If not wiser heads, then at least richer heads seem likely to prevail in the dispute over limits on executive pay in the stimulus package. The Obama version contained some restrictions on pay for top executives of banks that get “exceptional assistance” from the government. For instance, any compensation over $500,000 a year would have to take the form of stock, and couldn’t be cashed in until the government has been paid pack. Led by Sen. Chris Dodd (D-Conn.), senators insisted on inserting tougher restrictions and applying them to more people at more banks -- any, in fact, that have received so-called TARP, or bailout, money.

As a general principle, executive compensation ought to be set by supply and demand, just like other goods and services in a free market. In practice, the machinery that sets the pay for America’s top business executives is badly broken. Whether we want the government in there fixing it is a good question we can debate in a more leisurely economic period. But meanwhile it is a sign of how far we have come, and how fast, that any government bailout of a bank, no matter how few billions may be involved, can be officially considered “unexceptional.”

There is general agreement that some pay restrictions are justified, or at least unavoidable, if the bailout is to proceed. “Populism” demands it. (And it’s nice to see populist anger redirected back toward bankers and business executives after recent decades when the Republican party managed to point it at hard-working politicians.) But a consensus is emerging that Dodd, and even Obama, go too far.

The critics make three general points. First is that restrictions on things like bonuses are easy to evade, simply by relabeling them as salary, which is either unrestricted or less so. This, the critics note (with exasperation, and some justification), will break the connection between pay and performance that was considered so crucial during other banker-burning festivals of recent years. Second, compensation ceilings limited to executives at troubled banks that have received government money will put these banks at a disadvantage in the competition for talent -- just when they need talent the most. And third, the rules give these bank executives a strong incentive to pay back the government too quickly, in order to be free of the restrictions on their pay.

So let’s put this all together. Here is what supporters of the Bailout Bankers are saying: These bankers, who ran their banks into the ground, asked the taxpayers for money to save themselves, and got it, will -- if given the opportunity -- use that money to give themselves a back-door raise in order to maintain their incentive to do their jobs so brilliantly. If they don’t get their traditional bonuses, they will flee to banks that are not under these restrictions, because they did not need to be bailed out. And if, for some inexplicable reason, these other banks don’t wish to hire bank executives who ran their previous banks into the ground -- and into the reluctant arms of the government -- these bankers will stay where they are, nefariously pay back the government in full, and then -- out of either malice or incompetence, or some lethal combination of both -- they will wreck their banks and need to be bailed out all over again.

That’s quite a threat. The banks have been buying full-page newspaper ads (and God bless them for that!) to express their patriotism and humility. Their CEOs have been up on Capitol Hill eating crow and promising to be more careful from now on. Yet in this side argument, they are in essence promising that their selfishness and/or incompetence will continue.

Having never tried to run a bank, or wished to, I’m not saying it’s easy at any time, let alone now. But it’s hard to believe that the people at or near the top of the banks involved in the bailout are so irreplaceably qualified that incentives to keep them, and keep them happy, must be a major concern. In fact, of all the world’s seven billion people, these are the ones who have established better than anyone else that they aren’t qualified to run a bank.

By Michael Kinsley | February 16, 2009; 6:24 PM ET