Congress is about to do in one vote what years of shareholder agitation has failed to accomplish: sharply curb top executives' pay at poorly performing companies. The final version of the $787 billion stimulus bill steered clear of the hard $400,000 cap the original Senate version of the bill had embraced, but the new terms are pretty stiff nonetheless.
President Barack Obama's Feb. 4 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 Congress has shut that loophole by requiring that bonuses for executives at companies receiving money from the Troubled Asset Relief Program be no more than one-third of their total annual compensation, and come only in the form of restricted stock. Congress' restrictions also apply to all companies taking emergency government aid, adding hundreds of companies to the group the President singled out.
Other provisions include restricting any bonus payments until Uncle Sam is repaid, eliminating golden parachutes to departing executives, requiring bonuses be paid back to the Treasury if misleading earnings or other financial information is reported, and a mandatory "Say on Pay" in which shareholders will vote annually to approve executive compensation at all companies receiving money from TARP.
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.
According to Equilar, which tracks executive compensation, companies with $10 billion or more in assets that took taxpayer money from TARP paid their CEO an average of $11 million last year, including an average cash bonus of $2.5 million.
Groups in line with business thinking voiced relief at Congress' decision not to put the compensation ceiling at $400,000, including the Center on Executive Compensation, which quickly praised that move.
Will Top People Flee?
But pay consultants continue to fret that these moves will result in a damaging exodus of top banking talent. "The banks will be forced to choose between keeping their top talent and accepting the benefits of government funds," says David Wise, a pay consultant at Hay Group. "The focus of the banks will be on repaying the taxpayers as quickly as possible. But ultimately what's going to be in taxpayers' best interest is for these banks to perform over a long period." And that, he notes, is hard to do without top-notch people. "Some of the objectives feel right but implementation doesn't," he says.
Those pushing for restraints on executive pay liked the new restrictions, but still argue even these restrictions don't go far enough. "I am afraid that Congress missed a huge opportunity to protect taxpayers from further bailout profiteering," says Sarah Anderson, a pay expert at the Institute for Policy Studies. "The biggest weakness of the stimulus bill is that it fails to set a clear, measurable limit on all compensation. This opens the door for boards to shift compensation from bonuses to other pots, such as salary, pensions, deferred compensation, and perks."
Anderson and others will continue to beat the drum for more pay restrictions. The Institute for Policy Studies has already met with the Obama Administration about the President's promise to investigate executive pay. "We have a social responsibility in the United States to restrain excessive CEO pay," says Institute associate fellow Sam Pizzigati. "We don't depend on corporate boards to make sure companies don't dump toxic waste into our rivers, or to make sure employers don't discriminate against women or people of color. And we don't think we should rely on corporate boards to handle executive excesses."
Byrnes is a senior writer for BusinessWeek in New York.