The stupidity and pettiness of Christopher Dodd

When Senator Chris Dodd, (D-Connecticut) crammed what he dubbed "tough new limits" on "lavish Wall Street bonuses" into the stimulus package, he may have created a bigger problem for the economy than the one he was trying to solve. The reason? His plan inadvertently rewards nonperformance and will drive talented financiers away from the companies that need them most.

"There will be a flood of top performers leaving for positions that have no restrictions," says Richard Smith of the Sibson compensation consulting firm. The pay rules "will slow the only financial engine that can pull the economy out of this mess."

Senator Dodd tacked 11 pages of pay restrictions onto the stimulus bill at the last minute. (Dodd's office didn't return a call seeking comment.) The main reason they'll backfire is that they make pay for performance, otherwise known as bonuses, illegal beyond a modest allowance, yet they permit unlimited pay for nonperformance. An executive may be paid a guaranteed base salary of any size but may not receive a bonus exceeding one-third of total pay. And even that minor bonus cannot be based on profits; the rules prohibit any pay plan "that would encourage manipulation of the reported earnings" of the firm, which is of course what any plan based on profits would encourage. So paying top executives in any sensible way is forbidden

Another consequence of the new legislation is that it will drive the craftiest financial minds away from the most troubled institutions. The new rules apply to the five highest-paid executives, plus at least the next 20 highest-paid employees at the largest firms getting TARP funds - "at least" the next 20 because the Treasury Secretary can extend the rules to cover even more employees.

Senator Dodd's attempt to turn masters of the universe into bureaucrats even extends to where they dine. Instead of using the Zagat guide, TARP recipients may be expected to work from a list of restaurants "identified by the Secretary" of the Treasury, since by law he must now specify which entertainment expenditures are "excessive." Thus, a Washington civil servant could end up judging whether a Manhattan banker can take good customers to dinner at Per Se, or whether TGIF might be elegant enough to close a deal. Your tax dollars at work.