Has Brian Lenihan's decision to put a hard limit on bank executives' pay backfired? As the search for a new chief executive at AIB reaches the end of its sixth month with no appointment yet, bankers and investors are beginning to voice disquiet over the €500,000 limit finance minister Brian Lenihan applied to bankers' remuneration in February following recommendations from the Covered Institution Remuneration Oversight Committee (Ciroc).

The search at AIB has come down to the board wanting to promote an internal candidate, head of capital markets Colm Doherty, but Lenihan has reportedly rejected this because Doherty presided over a key division of the bank at a time when it made several terrible judgments. But no such magical candidate has materialised and various sources have grumbled that pay could be standing in the way of the banking sector getting back to business.

Lenihan and the government may have painted themselves into a corner with this one. On the one hand, Lenihan is understood to want an external candidate to run AIB. This is perfectly understandable, as the senior executives already at the bank presided over calamitous boomtime lending which has forced the state to intervene in the banking market and buy up billions in troubled assets. On the other hand, by imposing a €500,000 limit on executive pay, Lenihan is forcing the board of AIB to recruit with one hand tied behind its back.

In other words, the finance minister is discovering one of the iron laws of economics: price controls drive goods out of the market. Hence the current impasse.

The obvious problem with maintaining a strict cap on executive pay is that the market for bank executives is global and the other English-speaking countries have not imposed limits as we have. So while the board of AIB can search the four corners of the earth for a new chief, any prospective candidate is going to survey the other available options, especially once they get a look at the maximum salary.

Take Liam McGee, for example. Donegal-born McGee, head of consumer banking at Bank of America from 2001 until August of this year, was widely believed to be a serious contender for the AIB job. Late last month he took the chief executive post at Hartford Financial Services in Connecticut, a $287bn international insurer that will pay him $1.1m (€750,000) a year, plus millions more in share options.

Perhaps McGee had other reasons to take the Hartford job. Probably he did. But it is highly doubtful he ignored the 33% pay difference. And here is the kicker: Hartford has taken $3.4bn from the US government as part of the Troubled Asset Relief Programme, which means its own executive pay is also restricted by the Obama administration – just clearly not by as much as Irish executive pay.

Attracting new talent isn't the only problem the executive pay limit is causing. Keeping existing executives – specifically the ones who were not in their jobs when the bad stuff happened – will be next to impossible in the long term if they can see their peers in London, New York or Sydney making significantly more.

One bank chief complained to the Sunday Tribune that although he wasn't responsible for the actions of the chief executive who preceded him, he still had to accept far less pay as retribution for someone else's mistakes. This executive was adamant that, once the global recovery was well-established, he would explore job options in other markets.

"Remuneration is not specifically an issue [for my bank], but it is generally," he said. "Ireland is, I believe, the only western economy with restrictions on bank pay."

Institutional investors have noted the emerging pay gap as a problem too. While there is no consensus among the institutions on whether AIB, or the other banks, should have to look externally for replacement executives, there is a general view that a failure to find a suitable candidate for the country's biggest bank is the fundamental governance issue facing the banks, not pay and incentives.

"Bonuses are back in London and New York and it's harder to get a candidate," said one institutional source. "At €500,000 I'm not sure if they can find anyone."

If failure to find suitable people to run the banks has now become a governance problem, Lenihan has clearly become a victim of the law of unintended consequences: in trying to fix the problem of bad incentives at the top of the country's banks, he seems to have completely disincentivised the outsiders whom he apparently wants on the job.

This quandary is only going to get more difficult to solve. Wall Street institutions are already preparing a return to pre-crisis levels of compensation, with big banks and securities firms lining up $140bn in pay for the pinstripe brigade. Goldman Sachs alone will hand out $23bn in bonuses.

Now, this may be totally unsustainable – indeed, it has irrational exuberance written all over it – but it is a fact the Irish banks have to reckon with when scouting the talent pool for the bright sparks who (we hope) can guide them through Nama and a deep recession while rebuilding public trust and confidence.

The blunt reality is €500,000 doesn't buy you a lot of new banker at today's prices, as AIB and Lenihan are discovering. Actually, it might buy you no new banker at all.