Since the bailout bill made its way through congress last year, there have been several high profile news stories of excessive spending by the bailed out companies.  Obama has proposed capping executive pay at $500,000 a year for banks that receive bailout funds.

Obama said, “This is America.  We don’t disparage wealth. We don’t begrudge anybody for achieving success. And we believe success should be rewarded. But what gets people upset — and rightfully so — are executives being rewarded for failure, especially when those rewards are subsidized by U.S. taxpayers.”

It is hardly unreasonable for anyone including Obama to get upset about rewarding bank executives that were largely responsible for the banking mess.  But what Obama fails to realize is that limiting executive pay will not help the problem going forward.

Top executives can command top salaries that exceed Obama’s arbritary $500,000 a year limit.  Some say that is a sign of greed, but that is not necessarily the case.  A person may be the greediest person in the world yet make nowhere near $500,000 a year.  The salaries of top executives depend on what others are willing to pay them, not on their own greed.  Many celebrities make salaries greater than top executives but somehow they aren’t accused of being greedy.

Executive pay is set by supply and demand.  Some may make the case that companies grossly overpay executives.  Some executives are certainly overpaid, but that is not always the case.  Warren Buffet was on the board of the company that pubishes the Washington Post.  Buffet made cost saving suggestions that were worth billions of dollars, which was a ridiculous multiple of his compensation.

If a bailed out bank wants to hire a new executive with a track record of cost savings, they will have to bid for that person’s services in the open market.  If a bank is constrained by Obama’s artificial $500,000 a year salary limit, they will likely miss out on the opportunity to hire that person.  The taxpayers that are hoping for a return on the bailout investment will miss out as well.

Employees at any company at any level are hired only for the benefit of the employer.  If an employer chooses to pay an executive $50 million a year, the employer expects to get at least $50 million of economic benefit for having hired that person.   Limiting executive pay will deprive companies of the talent they need to be as successful as they can be.