The Obama Administration made big news today by announcing that the 25 highest compensated executives at the 7 biggest recipients of funds (Citigroup, AIG, Bank of America, GM, Chrysler, and the financing arms of GM and Chrysler) will see markedly reduced compensation this coming year. The blogosphere is of course up in arms about this; lots of libertarians and conservatives think that this is a horrendously bad decision, and that this will cause executives to flee these companies. I think differently. Here are a couple reasons:
1. Expectations: executives at these companies had to know this was coming once they asked for bailout money. Government money makes business decisions at these companies a political affair and it was unreasonable for executives to not make the calculation that politics would work in their favor. That is to say, the mass exodus everyone is predicting should have happened months ago. That an exodus has not happened is telling. Perhaps it is also true that these executives have nowhere to go; would you hire a GM executive with a resume detailing their role in running their companies to the ground?
2. More expectations: I bet executives at these companies look at the endgame. Ultimately either these companies will unwind their operations or will return to profitability. In 2-5 years it will have been better for executives at companies that expect to return to profitability to have stayed with the company than to have left and tried to find work elsewhere. At some point these companies will unwind themselves from the government lifeline and have freer reign to reset compensation schemes at which point loyal executives should expect to see themselves handsomely compensated.
3. Some of next year’s compensation for these executives will be in the form of stock options, not cash, in what looks like an effort to have executives invested in their company’s performance. An attempt to solve the principal-agent problem? Likely.
4. And finally, it seems to me that part of the message that the Administration is sending is that these executives are expendable. If we can find smart people like Geithner to run big, important organizations like the Treasury Dept. for a salary that’s just under 200K, then it seems obvious that we can find qualified, motivated people to replace executives who do choose to leave. There are a lot of smart people in the world and these executives don’t have a monopoly on the qualities that make good executives. In fact, it’s probably true that some of them just don’t, since it was under their watch that these companies asked for a bailout.
So is the Administration’s decision to cut executive compensation a big deal? I don’t think so. My argument boils down to two claims: first, that there will be no executive flight (it would have already happened), and second, that even if there is executive flight, it doesn’t matter because these people are replaceable.
Ducks and Economics 
Yes they are replaceable and it’s about time they are made accountable for their excesses.
shouldn’t the President, VP and the rest of Congress also take a cut up to 90% in pay? They are taxpayer funded, aren’t they? Tax cheat Geitner is the smartest guy Obama could find we are really in trouble!
I could concede your analysis here on the executive pay fiasco which, in my opinion, only serves as a red herring to divert attention away from the truly red-handed parties (hint: those who claim to be regulators, fraud police and the protectors of the public interest). But to classify someone such as Timothy Geithner as “smart” seems to be a stretch. We shan’t forget that he was serving as President of the New York Federal Reserve when the economic crisis was swelling up. Does failure negate smartness? Well, of course not, but the role he has played has fallen more to the sinister side of the bracket rather than the smart side. The fact that he has been given the combination to the US Treasury can be construed as humility and contrition because it comes with sub 200K salary or it can be construed as a strategic repositioning as he continues to play cover for the entire financial protection racket (as acceptance of a smaller salary is small potatoes when billions of dollars are cycling through his hands; well, not dollars but electronic key entries but the point remains). He leaves no doubt that his obfuscation skills are polished in this Digg interview: http://digg.com/dialogg/Timothy_Geithner_1. Almost as odd as the spectacle of his contradictory statements during the confirmation hearings pertaining to his tax filings.
Maybe the Philip Drus of the Obama regime rather than sending messages to executives at beleaguered financial institutions that would have been embalmed by now if not for their fiat subsidies, should personalize that message as those who subsidized them also see them as expendable. I wish I was referring to the voting population but in a country so obviously beholden to the banking cartels, I find it hard to credit the elections when it seems that there is also the possibility that Obama was pre-selected for pre-swearing an oath to protect the investments of his financiers as opposed to the continued daily impoverishment of thousands because of these parasites. For the Obama administration to now turn to those very institutions that assured his ascendancy to the throne of the United States corporation is a laughable sight to behold. The Federal Reserve (who holds trillions of United States debt) was the source of those subsidies and Bank of America and Citibank are veteran stockholders in the Federal Reserve. How can Geithner, with any modicum of integrity, a former consigliere of the Federal Reserve mafia, with straight face and conviction, pretend to guard the American account against the very stockholders in his former branch of work?
A perplexing conflict of interest deserving of a denouement.