In a pointed effort to assuage public anger over sky-high pay for corporate executives of failing companies, President Barack Obama proposes tight limits on compensation for business leaders who accept major infusions of tax dollars during hard times, including a $500,000 pay cap for top execs.
The rules are designed to keep executives of faltering companies from taking home huge compensation packages even though their firms crash and taxpayers bail them out. The new rules also seek to focus executives on long-term gains by permitting them to receive company stock that could be cashed in only after the companies are doing well enough to begin repaying their federal aid.
“We all need to take responsibility,” Obama said at the White House with Treasury Secretary Timothy 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, while tight by traditional Wall Street standards, will apply only going forward, not to executives of companies that have already received massive federal aid — such as Detroit automakers and major Wall Street financial institutions — unless they sought further bailout funds. The new restrictions, mandated by presidential executive order, would be waived for smaller aid recipients if executive pay was made public.
It is unclear how effective the new rules will be. Corporate America has shown remarkable ingenuity in getting around government restrictions. When restraints were imposed in the 1980s, for example, amid public concern about excessive pay and bonuses, it wasn’t long before companies developed stock option programs that poured money into executives’ pockets while skirting those rules.
Politically, the restrictions on executive compensation 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 as he is proposing to spend almost $1 trillion on an economic stimulus program and Republicans are attacking the plan as wasteful and ineffective.
Second, the rules were unveiled 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.
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 to the gathering storm clouds on Wednesday 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” — huge bailouts like those given to Citigroup and AIG — will not be allowed to pay senior executives more than $500,000 in total annual compensation.
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 restrictions 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 would be able to waive the rule if they publicly disclosed what they were doing.
In both cases, executive compensation will be subject to a non-binding vote of shareholders.
The $500,000 cap is low by Wall Street standards. The chief executive of Bank of America earned $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 succeed over time.
Recent history is filled with executives who haven’t met that theoretical standard. As of last month, the Treasury Department had injected approximately $177.5 billion into 214 banks.
Yet executives’ pay has been generous by Main Street standards. Banks with total assets of more than $10 billion paid their chief executives 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 Inc., an information services firm specializing in executive compensation.
Smaller banks were more modest in CEO compensation. Banks with assets from $1 billion to $9.9 billion paid an average of $858,754 in total compensation, and banks with less than $1 billion in assets paid an average of $384,011.
The administration’s new rules will go a long way toward winning back public faith, Geithner said Wednesday.
On the other hand, Graef Crystal, a former executive compensation consultant who has written six books on the subject, said the rules are more show than substance.
“There’s a lot of cosmetics, but in some ways it doesn’t have any teeth to it,” he said, pointing to the ability of companies to give an unlimited amount of restricted stock on top of the pay limit. “You can’t take more than $500,000 in cash, but there’s no reason why I can’t give you $100 million worth of free shares of stock.”
Although several lawmakers praised the new restrictions, Congress would like to do more. “Some of it may be a bit of theater right now,” said Claudia Allen, head of corporate governance practice for the Chicago-based law firm of 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,'” Allen said. “We’re going to watch taxpayer funds very closely.”
– – –
How the restrictions apply
Experts and others say there are ways around the new restrictions on pay.
The rules only apply to companies that receive government bailout money in the future.
Also, although executive salaries are capped, there are no limits on the scores of bond traders or investment bankers who typically pocket million-dollar bonuses.
Rep. Brad Sherman (D-Calif.) said the new rules have “three giant loopholes.”
There are no limits on luxury perks, such as private jets.
The restrictions don’t apply to companies that already have received TARP money unless they get more. And even when they do, most smaller firms can waive the rules by disclosing how much execs are paid.
— Washington Bureau
———-
cparsons@tribune.com
jpuzzanghera2@tribune.com
White House briefing
Read President Barack Obama’s remarks about his decision to impose new restrictions on executive pay at firms getting bailouts: chicagotribune.com/obamaceo
