Wall Street Bailout Could Crimp CEO Pay

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Legal Remedies May be Required

For one thing, executive compensation is typically governed by multiyear contracts. Forcing companies to change provisions in those contracts could require them to reopen negotiations with the executives who stand to lose benefits. Getting those execs to agree without sweetening the deal in some other way could prove difficult, especially if the executives are on their way out the door or face being ousted. "If I'm being invited to modify the agreement and then being shown the door at the same time, I'm probably not going to be too agreeable," says Lewis Wiener, head of the financial-services litigation practice at Sutherland Asbill & Brennan.

Nor are many executives likely to simply agree to give up pay because of public pressure and publicity, if recent history is any guide. Most executives who have agreed to surrender compensation have done so after being sued. Former UnitedHealth Group (UNH) Chief Executive William McGuire, for example, agreed earlier this month to repay $30 million and return some 3.7 million stock options to settle allegations of backdating stock-option awards. (McGuire denied wrongdoing.)

"People settle for all kinds of reasons, but usually it's because there's some kind of potentially valid legal claim," says Robert Salwen, a compensation consultant in Scarsdale, N.Y. "If that's not the case, then I wouldn't assume these people would be prepared to relinquish substantial sums of money, period."

Constitutional Challenge Possible

"Claw-back" provisions requiring executives to give up pay or severance benefits if corporate results prove to be misstated, for example, might be even trickier. Large companies have increasingly written claw-backs into executive-pay contracts, with triggers ranging from financial restatements to fraud. But where such clauses aren't already in place, the government's insistence on adding one could leave it open to a constitutional challenge under the Fifth Amendment, which bars the government from taking private property for public use without just compensation.

That's particularly true where the severance had already been earned by the executive or paid out to him. But even where the change modified existing severance promises by the company, executives could find plenty of room to sue, says Wiener, defending "takings" litigation in which plaintiffs argued that the government had taken property in violation of the Fifth Amendment. "I think there's merit to that case," he says.

In bankruptcy proceedings, creditors in some circumstances can seek to recover compensation already paid out, particularly if executives maintained the company was still solvent when it wasn't, says Paul Hodgson, a senior research associate at the Corporate Library, a corporate-governance research firm. Still, "if the company was solvent when it paid out the compensation, there's no real legal backing for recouping any of that" in bankruptcy court, Hodgson says.

Theo Francis is a writer in BusinessWeek's Washington bureau. With Jane Sasseen