There are a lot of reasons why people want to limit the pay of CEO’s, investment bankers, and money managers. Most of those reasons are bad. Yes, there is an unseemly disparity in income levels between the top and the bottom, and yes, no one needs to make $1,000,000,000 or more per year managing other people’s money. But limiting income disparity artificially and paying people “according to their needs” are bad ideas; they either remove incentives for achievement that create the wealth of the nation, or they delegate to fallible and corruptible bureaucrats decisions that the market can make in a dynamic and self-correcting manner.
But there is a second-order consequence of limiting pay. The current pay regime allegedly creates incentives to risky behavior – behavior of a sort that could bring down the financial system and the economy. If the claim is true – it is just a claim – then one needs to consider effectively limiting those incentives, and if limiting those incentives involves limiting pay, then that’s just how that cookie crumbles. One need not have a socialist bone in one’s body to want to protect our economy from collapse.
So, two questions arise. First, is economy-threatening risk-taking a product of the opportunity to make a ton of money risking other people’s money? And, second, if so, what should we do about it.
I can’t answer the first question. I can only say that I would entertain the possibility, and until I know the answer, I wouldn’t oppose efforts to limit compensation on principle.
As for the second question, how to limit pay, I think the income tax is the only viable approach. The progressive tax structure should add brackets at $1,000,000, $5,000,000, $25,000,000, and $125,000,000 of ordinary (not capital gain) income. And partnership income (e.g., hedge fund contingent management fees) should be treated as ordinary income to the extent the partner does not have a proportional amount at risk.
But that’s only if the case can be made that risk-taking was a but-for cause of the late unpleasantness. And I’m not sure that case can be made.