Uh-Oh: Maybe The Obama Pay Caps Will Have Some Bite


Wall Street traders aren’t too upset with the pay cap. They’re pretty confident that they’ll never get hit by the pay caps, even if their firm winds up need “extraordinary assistance” from the government. After all, the restrictions only apply to the top five senior executives not to traders lower down in the management structure, right?

Not so fast. The way the law defines “senior executive” is very different from what you might think of as a senior executive. It’s not just the chief executive officer and the chief financial officer and a bunch of other people with “chief” on their business cards. The law includes the CEO and the CFO and three other executives receiving the highest level of compensation. So a star trader getting a huge bonus could count as a “senior executive.”

“The question is whether star traders, many of whom carry the job title ‘vice president,’ or ‘head of global derivatives,’ are ‘executives’ or not.  ‘Senior executive’ is defined by the statute by compensation, not position,” David Zaring explains on the Conglomerate.

This creates a strange situation. The definition of senior officer is the CEO, CFO and three highest paid exectuves. The definition of executive is unclear, and may include anyone with supervisory or discretionary powers. The latest Treasury Department directive says these folks face a $500,000 pay cap. We think this means that the $500,000 limit applies to everyone, perhaps (ironically) excepting junior analysts and secretaries.

Unless we’re missing something, this seems to mean that any firm that gets extraordinary assistance in the future will be prohibitted from paying anyone more than $500,000, excluding restricted stock. And any other firm getting the regular TARP treatment in the future will have to ask shareholders for authorization to pay anyone more than $500,000. That’s a far broader restriction than we expected on our first reading.