Bank Rescue: Making Wall Street Pay?

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More Companies Have Clawbacks

Meyer says the most problematic pay provision in Treasury's rules may actually turn out to be the vaguest: The prohibition against incentives that "encourage unnecessary and excessive risks."

Particularly in the financial sector, the drive to link pay to financial performance has inextricably entwined risk and reward. Who's to say until after the fact how much risk is too much? Indeed, while companies in many other industries typically cap incentive pay in a given year, financial-services companies usually don't—giving executives incentive to shoot for the moon. "The more you make, the more you get," Meyer says. "Doing that could be deemed to be encouraging risk, because it really is. There's a tension in the system."

Treasury's requirement that companies impose clawbacks probably won't alter corporate compensation practices much, says Sabino Rodriguez, a partner in Day Pitney's executive-compensation practice. For one thing, similar rules already exist under some Federal Deposit Insurance Corp. regulations, and compensation consultants say companies have increasingly adopted clawback provisions covering financial restatements; this could accelerate the process.

"Not Being Forced on People"

As Congress debated the requirement, some compensation attorneys raised the prospect that it could trigger litigation on the grounds that the government was essentially taking something companies had already agreed to pay. But that problem has probably been disposed of neatly: The rule applies only to those companies seeking government funds, and becomes a condition of a voluntary program. "So presumably it's not being technically forced on people," Rodriguez says. It's up to the companies how they negotiate the changes with executives.

Treasury is also requiring companies it invests in to prohibit "golden parachutes" to top executives while the agency holds its shares, using an existing tax-code definition of that term that boils down to anything more than three times the executive's average salary and bonus for the previous five years. Bigger payments trigger a 20% excise tax on the executive.

Yet payments of that size often don't come up unless an executive is fired without cause shortly after a "change in control"—typically a corporate takeover, experts say. Severance in other circumstances often amounts to less.

Triggering the Excise Tax

Moreover, a significant number of companies are willing to trigger the excise tax in acquisitions, and simply "gross up" payments to the executive to prevent them from being diminished. "I don't think the golden parachute provisions are going to have a lot of effect outside of a change-in-control context," Rodriguez said.

Francis is a writer in BusinessWeek's Washington bureau.