Analysts have pointed out that restricting compensation, especially at financial firms that still have government loans, is playing with fire. The most talented employees will simply leave for companies that have no such restrictions, leaving their former employers floundering.
Pay czar Kenneth Feinberg appears ready to throw the cautionary comments about the migration of Wall Street talent to the wind. He will restrict large base pay packages and force bankers at firms that still owe money from various government bailouts to take more compensation in the form of stock, which they will then have to hold on to for several years.
According to The Wall Street Journal, "Mr. Feinberg is expected to issue by mid-October his determination on compensation packages for 175 of the most-highly compensated executives and employees at the seven firms he oversees." Many senior managers at large banks have base salaries well into the hundreds of thousands of dollars, so these new restrictions are likely to rankle them.
Feinferg is taking a big risk. Some of Wall Street's best companies, such as Goldman Sachs (GS) and Morgan Stanley (MS), have much more latitude in what they can pay key talent. Hedge funds and other private institutions have no restrictions at all, so luring the best people from companies facing the restrictions will be fairly easy.
Feinberg's philosophy about long-term compensation may be right, but the short-term consequences are sure to damage the firms over which has has power.
Douglas A. McIntyre is an editor at 24/7 Wall St.