Bankers should have seen it coming. Last week, President Obama referred to 2008 Wall Street bonus payouts as “shameful.” Today, he and Treasury Secretary Timothy Geithner announced a raft of new measures pertaining to the financial institutions, including a cap on banking executives’ annual compensation at $500,000.

The ones that got away
The compensation cap will apply only to banks that require “extraordinary” aid in the future, so it doesn’t cover the nine large banks that were part of the $350 billion first round of TARP (including Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC)). They’re exempted -- for now. They will, however, face increased disclosure requirements.

Not to worry; I suspect that the media glare and public outrage will keep excess in check at these institutions. Witness the brouhaha over Wells Fargo’s (now cancelled) Vegas outing. In any event, as JPMorgan Chase CEO Jamie Dimon rightly pointed out, politicians should avoid lumping all banks together when criticizing compensation. His firm is proof that not all TARP aid recipients are in a dire state. In fact, some relatively healthy banks were coerced into taking the aid.

Looking beyond the obvious culprits
One of the most interesting (and least publicized) aspects of the administration’s announcement is a “say on pay” measure which would enable shareholders to vote on executive compensation (the votes would be non-binding). This is an excellent step that should be enacted for all firms, not just financial institutions. “Say on pay” votes were put in place in the UK at the end of 2002, and the evidence to date suggests that they have tightened the link between CEO compensation and subpar company performance.

Of course, that assumes that shareholders are willing to make their voices heard. It should be clear that shareholders must bear their share of responsibility for breakdowns in corporate governance if they aren’t prepared to behave like owners. That responsibility is particularly important in the case of institutional investors, who are the largest shareholders of U.S. companies.

Size matters
As Warren Buffett said at the 2006 Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) annual meeting:

If the largest shareholders say, “This compensation plan doesn’t make any sense” and withhold their votes for directors, that will make a difference.

It’s highly unfortunate that directors and shareholders, through inaction, enabled a situation in which the government feels it is necessary to wield its heavy hand to effect change.

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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor pick.  Bank of America is a former Motley Fool Income Investor selection. Berkshire Hathaway is a Motley Fool Inside Value pick and a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.