Obama package to cap executive compensation
14 Feb 2009
The US House of Representatives voted on Friday to restrict bonuses and other forms of pay for top managers at banks and firms being helped by taxpayers under the $700 billion financial industry bailout.
The pay curbs were approved as an amendment to a $787 billion economic stimulus package. The new stimulus package, approved by the House of Representatives and the Senate, will now go to President Barack Obama for signing into law.
The limits are more stringent than those outlined by the Obama administration last week, but not as tough as pay cap proposals included in the Senate's version of the stimulus plan.
Obama's 4 February plan capped pay for executives at the very worst-off companies borrowing from the government at $500,000 a year, but left employers open to award millions in long-term restricted stock bonuses.
Now the Congress has shut that loophole by capping bonuses as well.
"The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence in efforts to stabilise the economy," Senate Banking Committee Chairman and main architect of the plan Chris Dodd said in a statement. "With vigorous oversight by the treasury department and by Congress these tough new rules will help ensure that taxpayer dollars no longer effectively subsidise lavish Wall Street bonuses."
Dodd said he was "delighted that my amendment to impose tough new limits on huge bonuses for executives working in firms that receive taxpayer funds will be included in the final economic recovery bill."
Bonuses that encourage senior managers "to take unnecessary and excessive risks that threaten the value" of the company would also be prohibited under Dodd's measure.
The pay curbs would apply to companies getting taxpayer aid under the Treasury Department's Troubled Asset Relief Program (TARP). The program was launched in October by the Bush administration as an emergency effort to stabilise the troubled financial system.
For small firms, pay limits could apply to just the most highly paid employee. For the large Wall Street firms that received multibillion dollar lifelines, the restrictions would be broader and could affect the 20 highest paid employees.
The limits would only apply to employees that are required to register with the Securities and Exchange Commission, which would generally exempt traders and other bankers that earn hefty salaries but aren't involved in executive decisions at firms.
The restrictions state that the size of a bonus could be no more than a third of the total annual compensation an executive receives. The bonus could not vest during the period the firm continues to owe money to the Treasury, according to the legislation.
There would be a ban on so-called golden parachutes to departing executives, and bonuses could be required to be paid back to the Treasury if it was discovered that misleading earnings or other financial information had been provided by the firm or an executive.
At firms receiving less than $25 million in government rescue assistance, the limits would apply to the highest-paid employee. Those who get $25 million to $250 million would see limits applied to at least the five most highly compensated executives. That doubles to the 10 highest-paid for those receiving between $250 million and $500 million, and doubles again to the top 20 employees of any company (currently including most banks and insurer American International Group (AIG) that receives $1 billion or more, though generally traders and investment bankers appear to be exempt.
Democratic senators had wanted to impose even stricter conditions. The Senate bill would have required bonuses already handed out to executives at TARP firms to be paid back, cap all executive compensation at TARP firms at $400,000 and ban any bonus for the top 25 employees at all TARP firms. None of this language appeared in the final legislation.
On the other hand, the Obama administration would have reserved the toughest conditions for companies that received firm-specific solutions under the TARP. At the moment, that would be limited to just Citigroup, Bank of America and AIG.
The final proposal would be revenue neutral, or wouldn't add to the federal budget deficit, according to the nonpartisan Joint Committee on Taxation. The same group had estimated the earlier provisions would have cost the Treasury nearly $11 billion over the next decade.
