Executive Pay: Will the Big Bucks Stop Here?

The President fires a warning shot across executives' bow, but the history of government efforts to rein in CEO pay is not encouraging

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President Obama's new restrictions on the pay of bailed-out finance executives is likely to ripple across the broader U.S. economy, experts say. But if the history of executive pay is any guide, it's more likely to influence how the money is doled out, not how much of it makes its way into the pockets of top brass.

Obama's cutbacks will certainly reduce executive pay at the largest firms directly affected in the short term. According to Equilar, which tracks executive compensation, companies with $10 billion or more in assets that took taxpayer money from the Troubled Asset Relief Program (TARP) paid their CEO an average of $11 million last year, including an average cash bonus of $2.5 million. By contrast, Obama is capping pay at $500,000, with no short-term bonus.

Long term, though, bank executives could still make out quite well. Pearl Meyer, senior managing director at pay consultants Steven Hall & Partners, notes that the plan does allow for long-term grants of unrestricted stock. Considering the low stock prices these banks currently trade for, that could represent a lot of upside.

Nix on Lavish Perks

Like many pay observers, Meyer thinks even non-TARP companies will embrace certain restrictions in order to seem in step with the new frugality the public is demanding. Severance packages should come down, and luxury perks such as company cars and lavish office redos are certain to be out, she says. Companies are already reducing merit pay because of poor business performance. Meyer's clients typically are cutting merit pay for all staffers from 3% or 4% of pay to 2%.

That's being applied to the top brass as well as the rank and file, something that didn't always happen in the past. And two-thirds of the largest U.S. companies have already put in place the kind of "claw-back" provisions that Obama advocates, where companies reclaim bonuses that were paid out for performance that later turns out to be illusory.

But the potential for long-term payouts on stock grants provided for in Obama's plan—even though they won't come through until taxpayers are paid back—provides a significant escape hatch for executives. That's why Meyers doubts the rules set forth by Obama on Feb. 4 will drop pay over the long haul.

Indeed, if anything, past government attempts at reining in pay have generally had the opposite effect. After Richard Nixon put in caps on raises for everyone, not just executives, during the inflationary 1970s, compensation went up across the board. One reason: A loophole let you get a raise if you were promoted, which led to a rise in promotions. Also, people demanded the maximum government-allowed raise, even if they would have settled for less without it.

Rules that Boomerang

A congressional $1 million cap on CEO salary tax deductibility in 1993 led to the current popularity of enormous stock option grants, mega- pension awards, huge severance payments, and perks galore. Special life-insurance arrangements arose that guaranteed executives substantially more income in future years, often subject to little or no taxes. Executive health-care benefits have grown richer as well, at times not only covering more services with less cost to the executives, but also extending for years—or even a lifetime—after departure. They were extended in many cases to cover spouses and children as well.