Nestled inside the $787 billion stimulus bill signed into law yesterday were a handful of provisions that ended the raucous payday party Wall Street's enjoyed for years. The most significant:

  • Banks receiving more than $500 million in TARP funds can't pay their 20 top-earning employees bonuses equating to more than one-third of their total compensation. So a banker with a $500,000 salary cannot receive a bonus greater than $250,000. Even better, bonuses have to be paid in restricted stock that can't be cashed out until taxpayers are repaid.
  • A new law mandates retroactive review of compensation paid to the top 25 earners of banks receiving TARP funds, seeking reimbursement if the compensation was "contrary to the public interest." (Hint: Most of it was.)

Money for nothing and bailouts for free
Needless to say, pay was nothing short of spectacular at the top investment banks during the boom years. Have a look:

Company

Average employee compensation 2007

Average employee compensation 2006

Average employee compensation 2005

Lehman Brothers

$332,000

$335,000

$315,000

Bear Stearns*

$242,000

$320,000

$300,000

Merrill Lynch**

$248,000

$300,000

$226,000

Morgan Stanley (NYSE:MS)

$343,000

$324,000

$271,000

Goldman Sachs (NYSE:GS)

$661,000

$622,000

$498,000

*Now part of JPMorgan Chase (NYSE:JPM).
**Now part of Bank of America.

This table depicts the mean compensation of everyone from janitors to CEOs. Hence, it's skewed by the top few who took home tens of millions. According to the U.S. Census Bureau, the average annual income for 2007 was around $40,000. Wall Street, meet reality. Proceed to hate each other.  

Despite the pay distortion between Wall Street and the average American, plenty of economists, politicians, and (of course) Wall Streeters are stomping their feet over the unintended consequences reining in pay could have. Their arguments focus on two points:

  • Restricting pay will create a brain drain of top talent from TARP-indebted companies like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) to those not affected by the new restrictions. The problem, critics say, is that by losing top talent, TARP-indebted companies will have a harder time repaying taxpayers.
  • Capping pay across the board at banks isn't fair to the employees of departments that are still profitable. Not every employee was peddling subprime mortgage-backed securities, and therefore, the innocents shouldn't be lumped in with their wayward peers.

Oh, please
I think both arguments are utter hogwash. Let's start with the obvious: Employee retention isn't a problem these days, especially on Wall Street. Global merger-and-acquisition volume is expected to fall 35% in 2009, and that's after 2008's plunge of around 30%. One estimate predicts that 2,000 hedge funds -- about 20% of the current total -- will go out of business in the next two years. That's on top of the 1,300 that closed their doors last year.

Those worried about a mass exodus of disgruntled bankers should have to answer an important question: Where will they all go? Who's hiring? Show me one bank recruiting in a meaningful way, and I'll show you 10 on the verge of bankruptcy.

Nevertheless, a few of the higher-ups will indeed find new positions elsewhere. Let them. Good riddance. Believe it or not, the sun will rise without John Thain. The thought that we should worry that the same people who caused this mess won't be around to try and fix it is borderline insanity. Rather than fretting about bankers quitting, it might be more appropriate to wonder why more haven't been arrested.

Their mistake, your problem
And how about the argument that not every employee working at these banks should be burdened by pay restrictions? "Those not directly involved in the credit market's undoing shouldn't be punished," the thought goes.

Give me a break. Try telling the laid-off employees of Microsoft (NASDAQ:MSFT) and Pfizer (NYSE:PFE) that everyone not tied to subprime mortgages deserves a gainful job. Or try telling the next generation of taxpayers (who'll be on the hook for these bailouts) that only those who were directly involved should have to pay. It's absurd.

Not everyone was involved in the economy's ruin, but everyone has been forced to make dealing with the outcome a personal sacrifice. The notion that demanding every bank employee sacrifice along with the rest of the economy is somehow "unfair" is utterly nuts.

Game over
Your party is over, Wall Street. You had your fun. The bill has come due. If you politely wouldn't mind, the rest of the economy would like to ask you to pay your fair share of the tab.

Considering what we've been through, that's not asking much.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Pfizer and JPMorgan Chase are Motley Fool Income Investor recommendations. Pfizer and Microsoft are Motley Fool Inside Value picks. The Fool has a disclosure policy.