Oct. 27 (Bloomberg) -- So I’m asking myself: If a top Wall Street executive has a $10 million co-op apartment in Manhattan and a $5 million home in the Hamptons, eats at all the fanciest restaurants and sends his children to top private schools and universities, how is he going to make ends meet with a cash income of $475,000?

The likely answer from the U.S. Treasury Department’s special master (aka pay czar), Kenneth Feinberg: That’s his problem.

The top 25 executives at the seven companies receiving “exceptional” assistance under the Troubled Asset Relief Program are the first targets of Feinberg’s pay rules. He now is looking at the pay of the next 75 executives at each company.

The rules cap the cash salary of a senior executive. He also may receive a so-called stock salary, which comes in shares that can’t be sold until 2011 -- and then, only at a maximum rate of one-third per year. Feinberg will allow bonuses, but these, too, must be paid in shares of company stock, and they can’t be sold until the government gets its TARP money back.

What of someone at a TARP-recipient company whose business unit’s profits are only loosely correlated with those of the parent company? Feinberg solved that issue in one case by engineering the sale of a subsidiary of Citigroup Inc. so that a $100 million bonus wouldn’t have to be paid on his watch. That extraordinary fix will be difficult to replicate.

There are three types of pay that Feinberg seems to be absolutely phobic about:

Bonuses Get Blamed

-- Cash bonuses. These are blamed for the financial crash. Yet there’s nothing wrong with a cash bonus if it’s properly designed and some of it is deferred, as a hostage for future bad results. Moreover, chief executive officers such as Richard Fuld of Lehman Brothers Holdings Inc. and Jimmy Cayne of Bear Stearns Cos. received huge grants of free shares in lieu of cash. They each lost almost $1 billion, suggesting that stock in lieu of cash isn’t a surefire way to avoid another financial meltdown.

-- Stock options. Here, too, the feeling out of Washington is that these are too risky. I don’t agree. Among other things, an option could be designed so that it can’t be exercised for at least five years and then forcibly exercised on a set date thereafter.

-- Supplemental Executive Retirement Plans. Bank of America Corp.’s Kenneth Lewis is about to retire, and he stands to receive a lump sum SERP payment of about $50 million. Feinberg seems aghast at the size of this pension, and if he could kill it with a sharp stick, he would. He probably has no legal authority to do that, though. So he is taking out his vengeance on the other Ken Lewises of the world by denying any further pension accruals under SERPs.

A Fix Undone

Feinberg’s behavior concerning SERPs is more than a bit troubling. Prior to 1974, a top executive was allowed to have the same pension, expressed as a percentage of pay, as his workers. Then came the Employment Retirement Income Security Act, known as ERISA, which capped pensions for highly paid executives. The CEO would now get a much lower percentage of his pay than his workers. So companies responded by designing SERPs to restore what ERISA took away.

Now we have Feinberg destroying what companies did to restore pensions destroyed by ERISA. Makes a lot of sense, doesn’t it?

The worst part of these controls is that, in the long run, they don’t work.

Nixon’s Controls

In the early 1970s, President Richard Nixon, of all people, slapped pay controls on the entire economy as part of his battle against inflation. During the course of his economic stabilization program, annual raises were briefly frozen, then capped at 5.5 percent a year among specified groups of employees, including executives, according to Martin Wertlieb, who oversaw executive compensation for the U.S. Pay Board.

But a competitor could lure me away for any sum it desired, provided that after that huge raise, my future pay increases fell under the cap. My former company could lure someone from another company in the same manner.

Then we had federal bureaucrats overseeing the precise definition of a “promotion,” which was allowed to carry a raise in excess of 5.5 percent. Any exceptions to the rules had to be approved by Washington.

And so we find Feinberg today, in his pay plan, permitting “exceptions where necessary to retain talent and protect taxpayer interests.”

Folly of Fritz

The case of Fritz Henderson, CEO of General Motors Co., illustrates the folly of efforts to regulate pay. Changes in his pay package forced by Feinberg will result in a fourfold increase, to $5.45 million, at a time when the company is awash in red ink. His reduced annual salary of $950,000 is to be supplemented by $4.2 million in restricted shares.

In short order, Feinberg’s solid block of rules will resemble a type of Swiss cheese that has more holes than substance. It is then that this whole stupid scheme will collapse.

In the meantime, companies outside Feinberg’s grasp will be shopping for suddenly under-priced talent, which will mean that Feinberg has to make further exceptions to bring in talent to replace that talent.

Feinberg says that what he has done should “become the model for the rest of Wall Street and Corporate America.” God help us.

(Graef Crystal is a columnist for Bloomberg News. The opinions expressed are his own.)

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To contact the writer of this column: Graef Crystal in Santa Rosa, CA at graefc@bloomberg.net.

Last Updated: October 26, 2009 21:00 EDT