When Senator Chris Dodd, (D-Connecticut) crammed what he dubbed "tough new limits" on "lavish Wall Street bonuses" into the stimulus package, he may have created a bigger problem for the economy than the one he was trying to solve. The reason? His plan inadvertently rewards nonperformance and will drive talented financiers away from the companies that need them most.
"There will be a flood of top performers leaving for positions that have no restrictions," says Richard Smith of the Sibson compensation consulting firm. The pay rules "will slow the only financial engine that can pull the economy out of this mess."
Senator Dodd tacked 11 pages of pay restrictions onto the stimulus bill at the last minute. (Dodd's office did not return phonecalls.)
The main reason they'll backfire is that they make pay for performance, otherwise known as bonuses, illegal beyond a modest allowance, yet they permit unlimited pay for nonperformance.
An executive may be paid a guaranteed base salary of any size but may not receive a bonus exceeding one-third of total pay. And even that minor bonus cannot be based on profits; the rules prohibit any pay plan "that would encourage manipulation of the reported earnings" of the firm, which is of course what any plan based on profits would encourage. So paying top executives in any sensible way is forbidden.
rest of article:
http://money.cnn.com/2009/03/06/magazines/fortune/colvin_bonus.fortune/index.htm?postversion=2009030609
