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Mixed response to Obama's planned $500,000 pay cap

Compensation consultants and other experts generally applaud President Barack Obama's plan to impose a $500,000 cap on the pay of top executives at companies that receive significant federal assistance in the future, but they voiced philosophical objections to government determining how much people can earn.

The experts said yesterday Obama had little choice but to take action after revelations last week that Wall Street firms paid more than $18 billion in bonuses to executives in 2008, despite a massive infusion of taxpayer dollars into their coffers.

But some experts said the plan has the potential of slowing an economic recovery, while others said it does not go far enough and should include all institutions that receive funds from the Troubled Asset Reduction Program, not just those that negotiated for "exceptional assistance."

"This is a small, but very welcome step toward ending excessive executive compensation," said Sarah Anderson, director of the global economy project at the Institute for Policy Studies, a Washington, D.C., think tank. "We think the moment for this is right now."

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Mark Rosen, managing director at Pearl Meyer & Partners, national compensation experts, said he had not yet read Obama's plan, but "My initial reaction is it's very reasonable to expect restraint in executive compensation if you're going to take taxpayer money."

The experts also raised the notion of government determining pay for the private sector. "I don't like the idea of government trying to determine pay, but they [government] are major benefactors to these firms," said David Schmidt, a senior consultant at James F. Reda & Associates, compensation experts in Manhattan.

Anderson, lead author of the institute's annual report on the gap between chief executive and worker pay, said she did not think Obama's plan goes far enough. The companies that negotiated agreements with the Treasury Department for "exceptional assistance" include American International Group, Bank of America, Citigroup and a few others. Other institutions also face the $500,000 limit if they receive government help, but that cap can be waived with full public disclosure and a nonbinding shareholder vote.

Anderson said the cap should apply fully to all institutions that get aid. "Their [the government's] argument is if they put tough restrictions across the board, companies won't participate in the bailout program because they would lose key personnel," she said. "We don't agree. It's that kind of thinking that got us into this mess in the first place."

Richard Sylla, a professor at New York University's Stern School of Business, said he understands the political necessity of Obama's action, but doesn't support them economically.

"As an economist, I don't like the idea of politicians saying certain people in certain industries can be paid only a certain sum," he said. "Would you apply that to Alex Rodriguez or Derek Jeter? After all, taxpayer money is put into" the new stadiums.

Michael Zweig, an economics professor at Stony Brook University, believes it was "legitimate" to cap salaries, but suggested another method: he said chief executives, for example, should receive no more than 40 times the pay of the average worker in their company. Zweig said that was the multiple in effect just before the beginning of the Reagan administration.

According to a 2008 report by the Institute for Policy Studies and United for a Fair Economy, CEOs of large U.S. companies in 2007 averaged 344 times the pay of the average U.S. worker.

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