Shameful, Perhaps, But Treasury's Response Will Likely Cause More Harm Than Good (Redux)

Treasury is considering new limits on executive compensation for certain companies participating under TARP.  Treasury is considering limits on bonuses and severance paid at companies that receive "exceptional" aid under TARP.  The problem is not the limitations but the companies subject to the limitations.  While we don't know yet what exceptional means, it probably applies to companies receiving, based on a yet to be determined metric, large payments.  These are likely to be the financial institutions in the most trouble and having the most difficulty returning to financial health.

Yet these will be the same companies subject to limits on executive compensation, particularly with respect to the CEO.  A CEO would, therefore, know that if he or she joined one of these financial institutions, companies in deep trouble, the CEO could be dismissed by the board without severence.  It would be like a law professor giving up his/her tenure.  Either the CEO will insist, as a result, on much higher compensation to pay for the risk or will simply not take the job.  Either way, the result is a bad one.

The problem is trying to fix a systemic problem by applying standards to only a small number of companies, probably the companies that need the most flexibility in determining executive compensation.  Treasury needs to work on a broader solution.