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President Barack Obama departs the Treasury building on Oct. 21, 2009 in Washington, DC.Pool

U.S. President Barack Obama is slashing the pay for top executives at such wards of the state as Citigroup Inc. and General Motors Corp. in a move that compensation experts say looks like good politics but bad business.

The government, according to a leaked plan, is forcing pay cuts of up to 50 per cent for top executives at those two companies, as well as at Bank of America, American International Group, Chrysler and the two big auto finance companies that are on government life support via the contentious TARP that funnelled billions of taxpayer dollars to troubled companies.

Cash salaries for the top 25 executives must be cut by 90 per cent, and total executive pay, encompassing bonuses and benefits, will fall by half. Perks of more than $25,000 in value must also be approved by the government.

Pressure has been steadily building on Mr. Obama to follow through on his promise to change the culture of business and do something about multimillion-dollar paycheques and gold-plated perk packages for bankers and executives who are widely viewed as responsible for the recession that is hammering the U.S.

The biggest affront to Main Street came in March, when AIG handed out $165-million in bonuses to members of the derivatives unit that caused the insurance company's downfall and led to the government having to step up with a bailout worth more than $170-billion. The pay issue has returned to the front pages in recent days: Banks such as Goldman Sachs Group Inc. have reported big profits and signalled that huge bonuses are back on Wall Street, and regulators around the globe have tried to find ways to tie pay more closely to performance and discourage excessive risk-taking.

With companies such as AIG seemingly "deaf" to public criticism of pay in the wake of the bailouts, the Obama administration had to crack down, said Eric Moskowitz, head of compensation consulting at New York-based Options Group, a global executive search firm.

"They have to make a big statement, I just don't know how effective it's going to be," he said.

In fact, some critics say Mr. Obama and the pay czar he appointed in June, Kenneth Feinberg, may be hurting the government's investment in firms like Citigroup. That's because rivals such as Goldman Sachs, which has repaid its government assistance, are now free to pay as much as they please and can steal top-producing employees.

"It's an atrocious way to run your business," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "Politics and economics don't mix and when they do you have disastrous results."

With 25 people at each company affected, the pay caps will go beyond just forcing symbolic reductions for those in the executive suite and inevitably lead to pay cuts for other key business leaders at the firms. They will be easy pickings for other banks that have the ability to pay more, recruiters said.

"There's good intentions there, but from a competitive standpoint it would put Bank of America and Citigroup in a precarious position when it comes to keeping heads of fixed income and heads of investment banking," Mr. Moskowitz said. "It's like a gift to the non-TARP banks."

Mr. Elson said the moves also send a clear signal that the government doesn't care about the returns of other shareholders in companies like Citigroup, where the government's stake is only about one-third.

For example, Mr. Feinberg recently boasted of his success in forcing Citigroup to sell its Phibro commodity trading unit to avoid a clash over the $100-million paycheque that was due to the top trader there. However, Phibro was consistently profitable for Citi, which lost $28-billion last year, leading to criticism from other shareholders of the bank.

"The government doesn't care if it makes less money because President Obama wants to be re-elected," Mr. Elson said. "The problem is what if you're an investor in those companies? You'll lose so he'll meet his political objectives."

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:10pm EDT.

SymbolName% changeLast
AIG-N
American International Group
-0.22%78.17
BAC-N
Bank of America Corp
+0.29%37.92
C-N
Citigroup Inc
+0.78%63.24
GM-N
General Motors Company
+1.7%45.35
GS-N
Goldman Sachs Group
+0.59%417.69

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