Wall Street Bailout Could Crimp CEO Pay


Democrats want to rein in rich exit packages and reclaim millions paid to bosses who piled up toxic mortgage assets. But it won't be easy

As Congress and the Bush Administration negotiate over the terms of a financial rescue bill, Democrats on Capitol Hill are drafting language designed to rein in executive compensation, in particular controversial severance packages at foundering companies. And for politicians concerned about the growing backlash on Main Street over what many see as a bailout of Wall Street fat cats, executive pay is a ripe target. After all, average total pay for a CEO at one of the 500 biggest companies last year was $12.8 million, double what it was a decade ago.

But compensation attorneys and experts say many of the restrictions could prove tough to enforce.

Executive pay was shaping up as one of a few remaining sticking points as Congress and the Republican Administration hurried to put a deal together amid further stock market declines on Sept. 22. In several areas the players were nearing accord, with Administration officials reportedly accepting some congressional oversight and relief for homeowners struggling to pay their mortgages—key provisions for Democrats.

Legislative language circulating on Capitol Hill on Monday afternoon also included mechanisms that would give the government ownership stakes in companies benefiting from the bailout, to make up for losses the government might incur. Senate Democrats revived a provision that would allow judges to modify the terms of mortgages in bankruptcy proceedings, much as other debts can be adjusted. But the financial-services industry is strongly opposed to the provision and some predicted it would not garner sufficient support in the House.

Vaguely Worded Provisions

Treasury Secretary Henry Paulson was scheduled to appear before the Senate Banking Committee on Tuesday, Sept. 23, with Federal Reserve Chairman Ben Bernanke and Christopher Cox, chairman of the Securities & Exchange Commission. Lawmakers have said they hope to craft a deal by the end of the week, when Congress is slated to adjourn.

Although executive-pay restrictions received considerable attention publicly and in negotiations on the Hill, the draft bills themselves included only short, vaguely worded sections that would require Treasury to limit pay and severance for executives at companies from which it buys troubled assets, while giving the agency wide discretion over the details. Treasury Secretary Paulson, acknowledging that "there have been excesses" in executive pay that should be addressed, has argued that the government's first priority should be stabilizing the financial markets, with compensation curbs and other reforms to come later.

A Senate discussion draft would require the government to ban incentive payments that the agency considers "inappropriate or excessive;" require executives to return incentives "based on earnings, gains, or other criteria that are later proven to be inaccurate;" and limit severance as "appropriate to the public interest" and the assistance the company receives.

Severance Pay Ban

Language in a draft House bill was similar, applying the restrictions for two years following Treasury assistance. But it also imposed additional restrictions on at least some companies, banning severance pay for top executives and requiring the companies to make it easier for substantial shareholders to nominate and elect board members and for shareholders generally to hold advisory votes on executive compensation.

Capitol Hill staffers acknowledged that the measures were worded broadly and said lawmakers want to give Treasury authority it can actually use. "The goal is something that sends a clear message of intention but is not necessarily binding" on Treasury, one senior congressional aide said.

A variety of obstacles face the Treasury if it ultimately sets out trying to enforce such provisions.

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.


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