Exec pay cap lacks bite
March 04, 2009
On Feb. 4, President Barack Obama's administration issued a public statement regarding the limits on executive compensation for companies participating in the Troubled Assets Relief Program in response to a then-recent report that Wall Street firms paid out $18 billion in bonuses, the sixth highest total in history, during one of the worst years in financial market history last year.
The administration's restrictions called for a cap of $500,000 on senior executives' total compensation, including salaries and bonuses, at firms receiving "exceptional assistance." This would include only a handful of the 49 recipients of TARP funds.
For the rest of that Wednesday, media outlets and editorials across the country debated Obama's plan. Some called it a reform that was long overdue; others called it punishing the wealthy. Some said it went too far; others said not far enough. While all this was going, collective Wall Street essentially took the restrictions for a joke.
Obama's plan allowed for loopholes that wouldn't prove difficult for firms to get around.
For example, while the executives' pay would be limited, their reception of restricted stock in the company would not be. The government has to be paid back before the executives can cash-out these stocks, but that doesn't count as reduced compensation, only delayed. The stocks will most likely be worth more as well when they're cashed in considering the current economic climate. Also, keep in mind that these resolutions are non-binding, which means they're not enforceable. Obama's plan amounted to only a guideline at this point that firms could have ignored if they wished.
In addition to all this, the non-partisan Joint Committee on Taxation found that these regulations, if followed, would cost the federal government $10.8 billion in lost tax revenues.
The following day, Feb. 5, Sen. Chris Dodd, chairman of the Senate Banking Committee, proposed an amendment to the Senate's version of the stimulus bill. This amendment, after a few changes, would make it into the final version of the bill approved by both the House and the Senate. The Joint Committee on Taxation found the final Dodd Amendment to be revenue neutral, meaning it would not add to the federal budget deficit.
Under the Dodd Amendment, a range of one to 20 executives of TARP firms will not receive a bonus larger than one-third of their total annual compensation as long as federal funds remain unpaid. It functions on a sliding scale.
For companies that have received $25 million or less, only the top executive is affected. For $25 million to $250 million, the top five highest paid executives will be restricted. At $250 million to $500 million, it moves to the top 10 executives, and for firms that received more than $500 million in federal assistance, the number jumps to the top 20 executives.
Similar to Obama's plan, the amendment would require TARP recipients to hold an annual "say-on-pay" shareholder vote to approve any executive compensation, and, if the bonuses are in stock form, they cannot vest while the firm continues to owe money to the Treasury. Also like Obama's plan, it doesn't function retroactively and only applies to bonuses in executive contracts signed after Feb. 11, 2009.
After the bill was passed, the Obama administration expressed disagreement with Dodd, saying it is concerned about a provision that doesn't require firms that pay back TARP money to replace the money with a similar amount from private sources which would not aid in the flow of credit.
The administration was also concerned because Dodd's amendment focused solely on bonuses and not total compensation for executives, but said these disagreements did not prevent Obama from signing the stimulus package. He said he would, instead, seek changes through more legislation. The administration has a full year to decide how the regulations will apply to the companies affected.
However, in days since the bill's signing, legislative and compensation analysts have said the Obama administration will have little leeway to alter the rules for executive compensation because most of the stipulations are specific.
The resolutions proposed by Obama and Dodd are a reflection of the American public's ire and are an attempt to create relative suffering on Wall Street, or at least the appearance of such — because that's what it mostly comes down to in the political world: good public image.
And that's what these current restrictions amount to, good public image on the part of politicians calling for reform.
Unfortunately, what's often overlooked is analysis by people like Brian Foley, a New York compensation specialist, who has said the salary cap would not have affected much of the $18 billion in bonuses given out last year because most of it went to lower-ranking executives not targeted in the Obama administration's plan.
But numbers aren't the point here. The executive compensation limits are meant as both a message to Americans that large firms are not being rewarded for mismanaging their money as well as a perceived punishment for firms.
While the Dodd Amendment is certainly causing more of an outrage on Wall Street than Obama's original resolutions, the compensation limits are hardly punishment since they lack the ability to curtail the majority of the bonuses paid out by TARP firms last year since the rules aren't applied retroactively.
There must be some level of accountability on the part of the firms receiving federal funds, but exactly what that level is has yet to be determined. It all depends on how Obama's administration chooses to interpret the recent legislation and any new rules set in the second half of the TARP funds.