Pay czar Kenneth Feinberg has already effectively clipped the compensation wings of Bank of America (NYSE:BAC) CEO Ken Lewis by taking away all of his 2009 compensation. Feinberg now plans to cut the pay packages of 175 executives at seven companies receiving federal aid by as much as 50%. Some base salaries will drop to a tenth of what they are now.

Not all the managers will lose the great majority of their compensation. Some of the money will be shifted into long- term bonus pools with the theory being that the alteration will cause executives to manage for multi-year results and take on less risk for their companies.

The Wall Street Journal reports that Feinberg will put more accountability with boards, which seem to have already been handpicked by the government. and insist that chairman and CEO roles be separate.

Feinberg’s decision may be based on several premises, some of which may not be true:

1. Companies receiving government aid should be almost entirely controlled by the government. This means that their major strategic decisions, board composition, and executive compensation should be approved by federal authorities.

2. The executives at the companies where the pay cuts are taking place are the same people who caused the economic disaster so they should be punished by working for very little pay.

3. No one at any US company should be paid an extravagant salary and bonus under any circumstance because American management compensation has gotten out of hand.

4. Senior executives at companies being bailed out cannot find jobs elsewhere, so the government has them trapped in their current positions.

The theory that most senior Wall St. managers cannot go somewhere else is only partially true and that has been pointed out on a number of occasions. The very best of the best will move to private equity firms, hedge funds, or companies like Goldman Sachs (NYSE:GS) or JP Morgan (NYSE:JPM) which are beyond Feinberg’s reach.

The most flawed part of the cut program is that some of the people facing lower pay are in their jobs because the government needed them in an hour of peril. Fritz Henderson, the CEO of GM, is an example. When Henderson’s boss was fired by The Treasury Department, car czar Steve Rattner gave him the equivalent of a battle field promotion. Henderson has been essential to whatever turnaround is happening at GM. Why his pay is being curtailed is a mystery.

Feinberg has decided on a “one size fits all” solution to the issue of compensation at bailed out companies. He may find that it backfires. Henderson may end up at VW.

Douglas A. McIntyre

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