Saturday, February 14, 2009

Senate Toughens Executive Pay Limits

Senate Democrats went against the wishes of the Obama administration and inserted even tougher executive compensation provisions in the stimulus package passed last night:

The pay restrictions resemble those that the Treasury Department announced this month, but are likely to ensnare more executives at many more companies and also to cut more deeply into the bonuses that often account for the bulk of annual pay.

The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.

The provision, written by Senator Christopher J. Dodd, Democrat of Connecticut, highlighted the growing wrath among lawmakers and voters over the lavish compensation that top Wall Street firms and big banks awarded to senior executives at the same time that many of the companies, teetering on the brink of insolvency, received taxpayer-paid bailouts.

“The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence,” Mr. Dodd said Friday. “These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.”

Not everyone is happy about the restrictions of course:

But some experts on executive compensation warned that the restrictions could unleash unintended consequences, like encouraging banks to increase salaries to make up for diminished incentive pay. Even then, they warned, banks were likely to lose top talent.

“These rules will not work,” James F. Reda, an independent compensation consultant, said on Friday. “Any smart executive will (a) pay back TARP money ASAP or (b) get another job.”

[...]

One unintended effect, compensation experts said, is that financial firms might increase banker salaries in order to increase the restricted stock awards. “About the only way to address these limits is to pay large salaries,” said Michael S. Melbinger, an executive compensation lawyer at Winston & Strawn in Chicago. “There’s no pay for performance in this.”

Others warned that because of the rules, firms might lose their best traders and managers to hedge funds and foreign banks.

Is this a hint of things to come?

Alan Johnson, a compensation consultant who advises many Wall Street banks, said that the rules would make it hard to recruit new managers, too.

“At some point, you begin to wonder: has the government given up on these companies anyway?” he said. “Why would the government or White House want to go along with that unless they have come to the conclusion they will have to nationalize these firms anyway?”

The idea has been bandied about, no doubt, largely because measures enacted and announced to this point have failed to get credit flowing again. Marc Ambinder at the Atlantic says the Obama administration is resistant to the idea, but if the latest plan announced by Geithner on Tuesday fails to get things moving, what alternative is there?

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