The Paradox of Compensation Limits

NEW YORK (TheStreet) -- The Obama administration is quickly learning two opposing realities about executive compensation: The public doesn't like hearing about big pay packages at bailed-out companies, but top executives don't work for paltry pay.

Unfortunately, just because the government has lent money to a company doesn't mean it can force employees to work for free.

The reality has become something of a liability for the winding down and regeneration of the country's most troubled firms.

The wave of bonus anger kicked off at the start of the year with American International Group(AIG) and Bank of America's(BAC) newly acquired Merrill Lynch division. Soon, Congressional hearings were held and investigations emerged and a "pay czar" -- a title given by the administration, not the press -- was hired to overhaul compensation practices at the seven biggest bailout recipients while the Federal Reserve constructed its own framework for pay policy.

The wave of Merrill defections crashed down hard and fast. Bank of America reportedly pointed out to the czar, Kenneth Feinberg, that nearly half of its 100 best-paid employees had left the bank by the time he asked for the list. AIG has lost employees too, the most notable of which was one who spewed his anger in a New York Times op-ed in March.

Citigroup(C), also among Feinberg's list of seven, lost not just a top producer but an immensely profitable division from the uproar. The bank divested Philbro, a commodities unit, and the unit's chief, Andrew Hall, after word spread that he may earn $100 million in compensation for a single year.