Rules seek a focus on the long term
President Obama’s new limits on executive compensation are designed not only to keep executives of faltering companies from taking home huge compensation packages, but also to focus them on long-term gains.
Among other provisions, executives will be barred from cashing in stock grants until their companies were going well enough to begin repaying their federal aid.
“We all need to take responsibility,” Obama said at the White House with Treasury Secretary Timothy F. Geithner at his side. “This includes executives at major financial firms who turned to the American people, hat in hand, when they were in trouble, even as they paid themselves customary lavish bonuses.”
But the rules, although tight by traditional Wall Street standards, apply only to future recipients, not to executives of companies that have already received massive federal aid -- such as the Detroit automakers and major Wall Street financial institutions -- unless they sought further bailouts.
For smaller aid recipients, the new restrictions will be waived if executive pay is made public.
The rules, which take effect immediately and do not require congressional approval, were designed to meet two goals. First, the White House wants to demonstrate that the president is a vigilant steward of the public’s money at a time when he is proposing to spend almost $1 trillion of it on an economic stimulus program and Republicans are attacking the plan as wasteful and ineffective.
Second, the rules were unveiled even as Obama’s economic team works feverishly to craft a master plan for spending the remainder of the $700-billion bailout fund approved by Congress last year -- a plan that could open the way to requests for more money to shore up the still-dysfunctional financial system.
And Obama’s tough talk about corporate responsibility is designed to lay the political groundwork not just for growth in his economic stimulus package as it wends its way through Congress, but also for the possibility of more bailout money in the near future.
Geithner alluded ominously Wednesday to the gathering storm clouds as he credited the bailout approved last fall with preventing a greater disaster.
“Those actions were absolutely necessary to prevent much greater damage than what we have seen today,” he said, “and we will have to do more -- substantially more -- to fix this crisis.”
Under the new rules, companies that receive “exceptional financial recovery assistance” will not be allowed to pay senior executives more than $500,000 in total annual compensation. The Treasury Department’s website did not detail “exceptional” aid.
The exception will be for grants of stock or other long-term incentives that contain restrictions specifying that they could be cashed in only after the government has been repaid or after a set period that took into account how the company had been repaying the federal money.
The restriction will be unbending for firms that get exceptional assistance from the federal government, although healthier banks applying for money from the Troubled Asset Relief Program will be able to waive the rule if they publicly disclose what they are doing.
In both cases, executive compensation will be subject to a nonbinding vote of shareholders.
The $500,000 cap is low by Wall Street standards. The chief executive of Bank of America received $20.4 million in 2007, a year before his institution hit such hard times that it took $45 billion in government bailout money.
The provisions reflect what the president says is his desire to protect taxpayers while also preserving the basic free-market approach to executive pay: Successful business leaders could reap big rewards -- if they succeeded over time.
Recent history is filled with executives who haven’t met that theoretical standard. As of last month, the Treasury Department had injected about $177.5 billion into 214 banks as part of TARP.
Yet executives’ pay has been generous by Main Street standards. Banks with total assets of more than $10 billion paid their CEOs an average of $11.1 million in annual compensation, including $844,229 in base salary, $2.6 million in bonuses and $7.4 million in stock and equity, according to Equilar, an information services firm specializing in executive compensation.
Smaller banks were more modest in CEO compensation. Banks with assets of $1 billion to $9.9 billion paid an average of $858,754 in average total compensation, and banks with less than $1 billion in assets paid an average of $384,011.
Reports of such pay have fueled ire on Capitol Hill, where new measures aimed at curtailing it bloom almost every day.
The administration’s new rules will go a long way toward winning back public faith, Geithner said Wednesday.
Although several lawmakers praised the new restrictions, Congress would like to do more. Rep. Brad Sherman (D-Sherman Oaks) said the new rules had “three giant loopholes.”
There are no limits on other luxury perks, such as private jets. The restrictions don’t apply to any companies that already have received TARP money unless they come back to the government for more. And even when they do, Sherman noted, most firms don’t qualify as big recipients and thus can waive the rules by disclosure.
“Some of it may be a bit of theater right now,” said Claudia Allen, chairwoman of the corporate-governance practice at Chicago-based law firm Neal, Gerber & Eisenberg, noting that the number of executives guaranteed to have their pay restricted by the rules is “a small universe.”
But the message Obama is sending may affect the behavior of many others, she said.
“He’s saying to corporate America, ‘You’ve got to get it right,’ ” she said. “We’re going to watch taxpayer funds very closely.”
Said Senate Banking Committee Chairman Christopher Dodd (D-Conn.): “There is absolutely no reason why hardworking American taxpayers should be financing, directly or indirectly, excessive compensation for corporate executives whose decisions, in many cases, have crippled their firms and weakened the broader economy.”