The Wall Street bailout bill unveiled Sunday has tough language about curbing executives' appetite for enriching themselves through the government plan.
But the legislation doesn't offer new solutions to the long-running attempt to rein in executive salaries. Instead, the main proposals build on existing rules regarding how much of their salaries a company can deduct for tax purposes and how liable top managers are for exaggerating company performance.
Corporate governance experts worried about whether the changes would work, saying that a lot depended on what rules were created after the bill's passage and how aggressively Washington officials enforced them.
"Everything here is going to depend on who they bring in to run this thing," said Nell Minow, editor of Corporate Library, a corporate governance research firm.
Executive compensation was one of the key issues for congressional negotiators. House Speaker Nancy Pelosi (D-San Francisco) said an attempt to limit so-called golden parachutes for executives who quit or are fired from their jobs was one of three sticking points in the final hours of talks because of "strong resistance" from the Bush administration.
The bill tries to address executive compensation for companies participating in the bailout program in several ways.
The toughest language, containing the fewest details, pertains to financial institutions that would sell mortgage-backed securities directly to the government with no competitive bidding. In those cases, the government would have an equity stake in the firms.
Until that stake is sold, according to the legislation, executives would not get incentives "to take unnecessary and excessive risks" and would have to give up or repay bonuses or other incentives based on financial statements that "are later proven to be materially inaccurate." The bill also would prohibit "any golden parachute payment to senior executives."
But those provisions are all extremely vague, corporate governance experts said.
"The first clause about excessive risk, I don't know how the hell they're going to interpret that," said Graef Crystal, a former executive compensation consultant who has written six books on the subject.
The legislation is less stringent -- and somewhat more detailed -- in provisions for financial institutions that sell their assets to the government through an auction.
Those provisions would apply only to companies that sell more than $300 million in assets and would subject companies and employees to extra taxes. Corporations would not be able to deduct any salary or deferred compensation of more than $500,000, and top executives would face a 20% excise tax on golden parachute payments if they left for any reason other than retirement.
Because the government is helping bail out the companies, "it's very appropriate for them to say there are a lot of things we're going to limit, and one of the things we're going to limit is executive pay," Minow said.
But the Treasury Department still would have to develop specific rules for enacting the limits, she said.
The ways in which the government would try to limit compensation aren't new -- and haven't always worked. In 1984, Congress tried to limit big severance packages by adding the excise tax to any payment that was more than 2.99 times an executive's annual salary. Companies simply began adding a bonus payment for the amount of the extra taxes.
In 1993, Congress prohibited companies from deducting more than $1 million in salary for top executives. The move failed to rein in salaries, and is believed to have led to the wide use of stock options as alternative compensation.
And the Sarbanes-Oxley reforms in 2002, spurred by major corporate accounting scandals, instituted a provision known as "claw back" for recouping executive compensation that was based on overstatements of financial results.
Minow said she was encouraged that the bailout bill included a lower standard for seeking repayment of bonuses for such overstatements, which now require a determination of misconduct. And Charles Tharpe, executive vice president for policy at the Center on Executive Compensation, said the bill's reduction in deductible salaries to $500,000 was a significant change.
But like others, he stressed that the devil is in the details, particularly when it comes to defining terms such as "excessive risk" by executives.
"You don't want to discourage risk, you just don't want to [give an] incentive [for] excessive risk, whatever that turns out to be defined as," said Tharpe, whose Washington organization promotes pay-for-performance policies on behalf of human resources executives.
The renewed focus on executive salaries is welcome, Tharpe said. But the fast-track legislation "is not going to be as well thought through."
Staff writer Nicole Gaouette contributed to this report.