President Obama moved Wednesday to rein in the pay of executives whose companies get taxpayer bailout money -- putting a $500,000 cap on annual compensation, limiting "golden parachutes" to departing bigwigs and requiring corporate boards to adopt policies on luxury expenditures such as lavish entertainment and parties.
Corporate watchdogs applauded the intent of the new measures, but compensation experts cautioned that abundant loopholes -- and crafty lawyers -- could undermine any lasting effect.
"You're pitting a group of government bureaucrats against compensation consultants and lawyers who are paid lots of money, and they're pretty damn smart," said Graef Crystal, a former executive compensation consultant who has written six books on the subject. "It's a lot easier to find ways around things like this than it is to invent them in the first place."
Under the new rules, companies that receive "exceptional financial recovery assistance" -- large bailouts like those given to Citigroup Inc. and American International Group Inc. -- would not be allowed to pay senior executives more than $500,000 in total annual compensation.
Obama's action was triggered by disclosures that Wall Street firms paid out almost $20 billion in bonuses last year, even as they were seeking or taking public money intended to spur the economy, and in spite of a flagging economy.
Over the last two decades, however, Wall Street and the rest of corporate America have skirted a series of rules that sought to rein in executive compensation. An attempt in 1993 to deal with such compensation is a textbook example.
With the country struggling economically, President Clinton signed a law limiting a company's ability to deduct more than $1 million in salary for top executives from their taxes.
It's widely believed to have backfired. Companies shifted to stock options, leading to an explosion in executive compensation through the rest of the 1990s and setting the stage for scandals over attempts to backdate the options to make them even more valuable.
Thanks to lucrative options and a strong stock market, the typical chief executive was earning 525 times the pay of the average U.S. worker by 2000, according to one recent study. The gap has narrowed in recent years, the study found, but CEOs still on average earn 344 times the salaries of average workers.
"Over the past 15 years there have been a number of efforts to put some sort of restriction on executive pay, both through legislation and through shareholder activism, and yet we see CEO pay continuing to rise," said Sarah Anderson, an executive-pay expert at the Institute for Policy Studies in Washington. "Wall Street has the best, shrewdest lawyers in the world looking to maintain these outrageous pay levels."
In 1984, for example, Congress sought to limit excessive severance packages, known as golden parachutes. Lawmakers changed the tax code so that any payment more than 2.99 times an executive's annual salary was hit with a 20% excise tax.
But most companies were only providing severance of one year's salary to their executives. Companies interpreted the new tax rules to mean that anything up to three times the salary was permissible, and severance packages rose to that level.
Many companies also responded by simply paying the executives' taxes -- a practice known appropriately enough as a "gross up."
Just as in the past, there are ways around Obama's rules.
First, they apply only to companies that receive government bailout money in the future. For companies that don't receive "exceptional financial recovery assistance" -- such as the outsize bailouts that went to AIG and Citigroup -- the restrictions on executive pay would be waived if the company discloses the compensation and allows a nonbinding shareholder vote.
Companies that don't have the restrictions waived still could pay an unlimited amount in restricted stock and other incentives. The incentives can be cashed in after the company has paid the government back, but also if the government decides after an undetermined period that the company has shown it is meeting its repayment obligations. The Treasury website did not detail what constitutes "exceptional" aid.
Also, while executive salaries are capped, there are no limits on the scores of mid-level Wall Streeters such as bond traders or investment bankers who typically pocket million-dollar bonuses.
"It's a move in the right direction, but it doesn't have enough teeth and on some items doesn't go deep enough," said Brian Foley, a pay expert in White Plains, N.Y. "It's important not to be too intrusive, but particularly with companies that have gotten exceptional assistance, the rules ought to be truly tough."
Some critics of Obama's plan said restricting executive pay would dissuade the most talented people from working at the companies most in need of help, or dissuade companies from seeking necessary government aid.
Steve Bartlett, president of the Financial Services Roundtable, which represents large financial institutions, called Obama's restrictions "a measured response" but warned they still could cause problems.
"Political decisions like this often have unintended consequences that could hamper the economic recovery," he said. "Healthy banks will begin to stray away from using [Troubled Asset Relief Program] capital."
Crystal warned of another potential consequence: a desperate desire by banks that need government assistance to get out from under the compensation restrictions.
"It's an incentive to find a way to pay the government back -- however you get there," he said. "It could encourage bad behavior."
But others said people on Wall Street had more pressing demands than worrying about their gargantuan pay.
"It would be nice if they applied their brilliant minds to not getting us into this mess in the first place [rather than in] finding ways to not limit executive compensation," said Paul Hodgson, a pay expert at Corporate Library, a corporate-governance research firm.