Germany backs off from hard cap on bank execs’ pay
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Germany had been planning to firmly cap bank executives’ pay as part of the government’s program to bolster the finances of lending institutions. It sounded like a model for the U.S.
Not so fast, apparently.
From Bloomberg News:
German Chancellor Angela Merkel’s cabinet retreated from plans to limit pay for banking executives seeking state funds, opting instead for ‘flexibility’ amid legal concerns and disagreements between the ruling parties. The cabinet, meeting in Berlin [Monday], passed a regulation which says that annual pay for bank managers exceeding 500,000 euros ($668,000) per year is ‘inappropriate in principle,’ according to a copy e-mailed by the Finance Ministry. The original text simply gave 500,000 euros as the limit. ‘The government is counting on managers reading the way the wind is blowing and volunteering a cap on wages to save their bank,’ Otto Bernhardt, parliamentary finance spokesman for Merkel’s Christian Democrats and chairman of a joint committee reviewing manager pay.
The U.S. Treasury’s capital-infusion plan for banks bans golden parachutes for executives of participating institutions but doesn’t cap pay outright. Instead, the plan says a company can’t take a tax deduction for more than $500,000 in annual pay per top executive, half the $1-million ceiling that applies to businesses in general.
So if a participating bank’s board chooses to pay an executive more than $500,000, the tax-deduction cap means shareholders take the hit.
The history of government attempts to restrain executive pay shows that compensation consultants inevitably find ways around any limits. It’s going to be very interesting to see what happens this time around, with taxpayer money at stake in the banks.