Treasury Won't Cap Salary at TARP Firms

Removing one major source of uncertainty in the bank compensation picture, the Obama administration reportedly decided to scrap an announced $500,000 salary cap for employees at firms receiving taxpayer-funded aid.

However, TARP recipient firms will still be subject to a separate bonus cap enacted by Congress, plus stringent oversight by the administration's newly named "pay czar," Kenneth Feinberg. And all financial institutions operating in the U.S. will face as yet undisclosed pay guidelines as part of a broad regulatory overhaul the administration is expected to unveil next week.

The Wall Street Journal reports: "Treasury Secretary Timothy Geithner is expected to push all firms -- not just those receiving funds from the government's Troubled Asset Relief Program -- to more closely tie incentive compensation to long-term performance by paying employees in restricted stock, rather than cash."

The good news: the broad guidance issued to non-TARP institutions will be "voluntary, along the lines of 'best practices' that banks will be expected to abide by," according to the WSJ.

The report reinforces expectations that the financial industry will split into two tiers: banks that remain on a taxpayer-supported lifeline will be kept on a tight leash in terms of compensation and other business decisions, while those that regain financial independence will face far less heavy-handed interference in how they operate.

The withdrawal of the administration's salary cap idea is slated to be announced later Wednesday. On Tuesday, Treasury approved requests from 10 major institutions to repay $68 billion in bailout aid. Repaying their TARP injections is expected to allow banks such as Goldman Sachs, JPMorgan Chase and Morgan Stanley to escape stringent limits on how they can pay their executives, traders and other rank-and-file employees.