October 28, 2009 - The federal pay czar is doing his job. He's cutting enormous paydays for executives of banks and other institutions that took TARP money. That's as it should be. Those banks performed terribly. Several would have simply vanished if the government hadn't bailed them out. Since capitalism is all about rewarding risk and merit, these executives don't deserve extraordinary payments.

This year, it doesn't matter how you feel. If you're a senior manager in one of the floundering banks, you won't get what you're supposed to. The bank as whole was in trouble so all personnel will pay the price. That means you can look at your contract all you want. You won't get what it says you will.

So what do you do? You will most likely look for another job, particularly a job in a company that hasn't taken TARP money, get a new contract and go to work, doing your best to beat the benchmarks that describe how you will be paid. Then, if you're successful, you'll make the money you earned at the end of the year.

When I was on Wall Street, the best and brightest weren't held at the big firms with contracts. In fact, there were very few contracts. That's because senior management always wanted the ability to pay anyone they wanted any amount of money. If one department did well, but the firm had a bad year, they still paid the top performers of the division that performed because if they didn't, those superstars would simply walk away, to another big firm, set up their screens and make huge profits for a new firm. Sometimes the heads of departments that didn't do well, still got huge payments because their talent was unique, and management knew that the next year those people could make large profits. Those bonuses in bad years came from people who were promised (remember, no contracts here) certain payouts but then would not get them. Those who were "robbed" most often quit, having been cheated from something they earned.

Now we're dealing with a similar circumstance. Very smart people have helped keep many financial institutions going during these tough times. They've done it not because they love their jobs, but because they have a contract that states they will be paid well for performance. With the new federal government overseer, those contracts make good wallpaper but not much else.

If you were one of the hard working, profit making individuals at these firms and your salary and/or bonus was cut, what would you do? I know I'd be looking for another job because there have been many long days and nights worked this past year at many firms, even with the TARP money to help keep the doors open. It's been difficult to keep morale up and perform when job security was always a major concern. With the hard work and the anxiety, most of these people will feel they deserve, have earned, their large salaries and bonuses. But they're going to be disappointed.

From a greater good perspective, it's the right thing to do. Just be aware, as an investor, many of the people who contribute to the well-being of the firm are even now looking for another job, one where the government isn't part of the unknown. And when the best people leave, service deteriorates, new products aren't developed, competition attacks and wins.

This is particularly true in banking. If you own one or more of the TARP banks or financial institutions, you'll want to watch employment turnover next year. If you can find out during quarterly conference calls if key individuals are leaving, you may reconsider owning the stock. Many times newspapers and magazines will report on who's leaving and how significant they are. Banking is a service business. Service means people helping other people. When the best ones leave, everything starts to come apart.

Sure, it's a good thing that senior management at TARP aided firms won't be getting outrageous payments. When the government gives a company money, there are strings attached. This was one of the ropes that came with the money. While we might feel it's a good thing, there are two consequences obvious from this new tactic on pay days: one is that the best people who get less than what they contractually deserve will most likely leave. And second and maybe far more important: it's a sign that the government is getting more and more involved with private enterprise. That may be even more troubling.

ed Allrich