Updated from 12:25 p.m. EST

President Barack Obama's proposed clampdown on CEO salaries for companies getting a government handout may be misguided in its execution, even if the spirit of the move makes political sense, Wall Street analysts and observers say.

Analysts are concerned that

Obama's $500,000 salary cap

for senior executives is indicative of misplaced priorities. Although some believe that heads of major financial institutions should not benefit as the country is rocked by their previous excesses, they contend the salary cap is unscientific in its approach and fails to address the much larger problems associated with the credit crisis.

"One of the problems we're having ... is we're confusing policy, economic policy, with social justice. I'm not sure the two should go together," says Jim Paulsen, chief investment strategist at Wells Capital Management.

The pay curbs , presented by Obama and Treasury Secretary Timothy Geithner Wednesday, will effectively limit executive compensation at firms that receive "exceptional" government assistance in the future. The restrictions will not be retroactive for companies such as

AIG

(AIG) - Get Report

,

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

, which already have received support that extends beyond the Troubled Asset Relief Program's Capital Purchase Plan.

Brent Longnecker, chairman of compensation consulting firm Longnecker and Associates, says that payout limits are warranted, but he wishes the administration had been less simplistic in its approach. The government would be wise to determine a range of compensation through the industry, and then, for example, cap salaries at the 50th percentile, he says.

If Obama had done this, "He would have gotten into the science of comp, rather than the emotion of comp," says Longnecker, who is concerned that firms seeking top talent to navigate their way out of the financial crisis will be hamstrung by stringent salary requirements.

Others echo Longnecker's concern. "These banks are going to look more and more like the Division of Motor Vehicles," says Michael Pento, chief economist at Delta Global Advisors.

There is circumstantial evidence of high-power employees leaving for firms that don't face government restrictions.

TheStreet.com

on Tuesday reported that 12 investment bankers left

Bank of America

to join Deutsche Bank. Based in Germany, Deutsche Bank has not received TARP funds and is not subject to the Obama salary curbs.

General Electric

(GE) - Get Report

CEO Jeff Immelt, whose company has not received federal assistance, said limiting salary ran counter to addressing the problems that confront banks.

"It's in the best interests of taxpayers to have Jamie Dimon running

JPMorgan

(JPM) - Get Report

," Immelt said, according to the

Associated Press

. "They should want to have the best people on Earth running these banks. Capping pay is not conducive to that outcome."

Not everyone is overly concerned about a brain drain.

"Some would be comfortable with a low salary, so long as they had some chance of additional compensation, which is allowed in this plan in the form of restricted stock," says Hugh Johnson, chief investment strategist at Johnson Illington Advisors.

Johnson says that although banking culture is more flexible in terms of rewards for employees, former investment banks such as

Goldman Sachs

(GS) - Get Report

will have a bigger problem with salary caps. "Goldman will not accept additional TARP money," he says.

Longnecker agrees that different companies will react differently, but adds that banks such as BofA, which have investment-banking arms, may see a negative impact on their earnings if their top employees leave.

The salary cap could carry additional unintended consequences, says Pento. Management at banks will want to quickly repay the government investments and secure their freedom from restrictions.

"The way they're going to do that is make as many loans as possible," says Pento, who says that with consumer debt at 96% of GDP, rapid lending is not the solution to the current crisis.

On the other hand, Pento and others agree that banks that have accepted TARP money deserve to see some pay curbs.

"When you take government money, you have sort of abdicated your right to operate within the free market exclusively," says Pento. "The other argument you can make is: How talented were these people? I question that premise to begin with."

One question that remains unresolved is the enforcement of the new rules, Longnecker says. For instance, how will the government define $500,000 cash? He's also concerned that the rule may not extend beyond top-level executives, resulting in higher pay for lower-ranking employees.

In any case, the priority ought to be fixing the severe recession, says Paulsen. The impact of falling housing prices and declines in the stock market is far greater than that of expenditures on corporate junkets and executive perks.

Paulsen says it would be wiser to determine what is owed by the financial firms once the economy has stabilized. In the meantime, the focus on compensation restrictions is an unneeded distraction.

"It's retarding our efforts," he says. "I think that's wrong. Not justice-wrong, but just a wrong way to approach what we're trying to do here."