Fixing What's Broken

Nine months ago, the nation was outraged over the awarding of bonuses to some of the executives whose firms’ irresponsible actions helped precipitate the financial crisis. Now, America’s focus on financial regulation seems to have shifted to the other issues of the day.

But the most recent round of bonuses at some of the nation’s most moneyed corporations has not escaped the notice of the Obama administration, which has ordered average compensation reductions of 50 percent at seven of the largest recipients of federal bailout funds. The cuts will affect the executives of some of the companies most closely linked with the recession, including American International Group, General Motors, and Citigroup. However, other firms that have already paid off their bailout loans, like financial behemoths Goldman Sachs and Morgan Stanley, are immune from these restrictions and may continue to award massive bonuses to their executives.

The Obama administration’s move to slash the pay of many top executives at the seven firms that have still not paid off their bailout loans is an understandable attempt to create a sense of accountability for corporate executives. It is a bold policy move that attempts to send the message that irresponsible behavior should not and will not be rewarded with massive compensation.

However, the policy is ultimately little more than a symbolic gesture and a Band-Aid fix to a problem that is in dire need of a suture. Simply cutting the pay of executives does little to address the systemic problems that helped give rise to the financial crisis. The Obama administration now has a unique opportunity to capitalize on populist discontent with policies that correct the lax regulatory regime that helped enable the financial meltdown. Real change to the current system, which incentivizes unnecessary risk-taking and corporate irresponsibility, cannot be replaced with simply cutting executive pay. The recent cuts are, in reality, a slap on the wrist for executives who will still enjoy multi-million-dollar pay packages and does not affect companies who were equally complicit in the crisis if they have already paid off their bailout loans.

The pay cuts will likely garner some level of popular support and allow the Obama administration to maintain an image of being tough on corporate excess. But they do not represent a long-term solution to a potentially recurring problem. Without long-term and thoughtful policy supporting these pay cuts, what’s past will likely be prologue. There are real and persistent problems in the current system, and if the current administration is genuinely interested in securing America against economic declines of this magnitude in the future, it must engage the problem with long-term regulatory focus in mind.

Nine months ago, the nation was outraged over the awarding of bonuses to some of the executives whose firms’ irresponsible actions helped precipitate the financial crisis. Now, America’s focus on financial regulation seems to have shifted to the other issues of the day.

But the most recent round of bonuses at some of the nation’s most moneyed corporations has not escaped the notice of the Obama administration, which has ordered average compensation reductions of 50 percent at seven of the largest recipients of federal bailout funds. The cuts will affect the executives of some of the companies most closely linked with the recession, including American International Group, General Motors, and Citigroup. However, other firms that have already paid off their bailout loans, like financial behemoths Goldman Sachs and Morgan Stanley, are immune from these restrictions and may continue to award massive bonuses to their executives.

The Obama administration’s move to slash the pay of many top executives at the seven firms that have still not paid off their bailout loans is an understandable attempt to create a sense of accountability for corporate executives. It is a bold policy move that attempts to send the message that irresponsible behavior should not and will not be rewarded with massive compensation.

However, the policy is ultimately little more than a symbolic gesture and a Band-Aid fix to a problem that is in dire need of a suture. Simply cutting the pay of executives does little to address the systemic problems that helped give rise to the financial crisis. The Obama administration now has a unique opportunity to capitalize on populist discontent with policies that correct the lax regulatory regime that helped enable the financial meltdown. Real change to the current system, which incentivizes unnecessary risk-taking and corporate irresponsibility, cannot be replaced with simply cutting executive pay. The recent cuts are, in reality, a slap on the wrist for executives who will still enjoy multi-million-dollar pay packages and does not affect companies who were equally complicit in the crisis if they have already paid off their bailout loans.

The pay cuts will likely garner some level of popular support and allow the Obama administration to maintain an image of being tough on corporate excess. But they do not represent a long-term solution to a potentially recurring problem. Without long-term and thoughtful policy supporting these pay cuts, what’s past will likely be prologue. There are real and persistent problems in the current system, and if the current administration is genuinely interested in securing America against economic declines of this magnitude in the future, it must engage the problem with long-term regulatory focus in mind.