Last week, the Obama administration's "pay czar," Kenneth Feinberg, announced that the government will impose caps on compensation for the 25 highest-paid executives at seven companies that received "exceptional assistance" through the Troubled Asset Relief Program -- including American International Group (AIG), Bank of America, Citigroup, Chrysler, Chrysler Financial, General Motors and GMAC. Under the new regulations, salaries will be reduced by an average of 90%, and total compensation (including bonuses and stock options) will be lowered by 50%. Knowledge@Wharton spoke with Wharton accounting professor Wayne R. Guay and then with finance professor Alex Edmans about what these changes could mean for Wall Street, company shareholders and taxpayers.
The following is an edited transcript of the interviews.
Interview with Wayne Guay:
Knowledge@Wharton: In the overall context of reforming regulations after the financial crisis, how important is the executive pay issue?
Wayne R. Guay: We need to think about how executive pay is related to the financial crisis. We want to keep our eyes on the ball ... with respect to the risk issues.... Much of the effort that we have heard about in the last week or so has been related to the level of pay that executives might be taking in. I don't think that was much of a factor in the financial crisis.
The large financial institutions didn't run into trouble because they were overpaying their executives. The amount of compensation these individuals were taking home is not what caused this problem. The problem was these institutions had a lot of similar risk structures that got hit with some of the same underlying fundamentals in the economy, which caused all of them to experience substantial losses at a similar point in time.
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