New Law Seeks to Limit Executive Compensation

Congress approves a massive plan to shore up the U.S. financial system, despite a stunning early defeat. The Senate passed the legislation on Wednesday evening, and the House passed the legislation on Friday afternoon.
By Heather Landy
Special to The Washington Post
Saturday, October 4, 2008

In the first significant attempt by Congress to legislate executive pay, the $700 billion financial rescue plan signed into law yesterday includes efforts to rein in the use of "golden parachutes," banning the giant windfalls in some cases and imposing bigger tax penalties in others.

But executive pay experts said the regulations are too weak to spark major reform in the way companies compensate top officers, and too narrow in scope to change the pay structure that encouraged finance executives in boom times to take on enormous risks.

Graef Crystal, a longtime executive pay consultant who now runs a Web site devoted to compensation issues, said there is ample room for companies to maneuver around the new restrictions on golden parachutes, the parting packages often awarded to executives upon a change in control of their companies. And the alternatives offered to attract executives, such as outsized signing bonuses or bigger base salaries, can also short-change shareholders, he said.

"If you're going to bail these people out, there should be some very stringent controls," Crystal said. But the bill "is like somebody aiming a gun through the window; they've got in their sights a CEO, and then they decide to shift over a little bit and drill a shareholder instead. The CEO just keeps walking and doesn't even know he might have gotten hurt."

The pay provisions, which were left intact from the version of the rescue bill that failed in the House on Monday, prohibit golden parachutes for executives of companies that directly sell troubled assets to the Treasury.

But most of the assets the government will take over are expected to be transferred through auctions. For a company that unloads securities at auction, the golden parachute ban applies only to new employment contracts penned during the rescue period, and only if the company has auctioned more than $300 million of assets.

Companies that auction assets also will see their tax deductions for executive compensation cut in half to $500,000, while executives receiving golden parachutes under existing contracts may face a 20 percent surtax on the payments.

Most of the compensation provisions in the bill apply only to senior officers, and not necessarily to star traders who are handsomely rewarded -- sometimes earning more than the executives they report to -- when big investment risks pay off.

Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business, said he was glad the federal government attempted to set pay standards for companies that would benefit from a taxpayer-financed bailout. But he said the bill would do little to change runaway pay packages or the incentives that led Wall Street leaders to shoulder increasing amounts of risk.

"Golden parachutes, while I know are very disturbing to people, are not the problem in this context. People do not run companies into the ground for the purposes of getting golden parachutes," Morici said.

U.S. Senate Finance Committee Chairman Max Baucus (D-Mont.) acknowledged earlier this week that the pay regulations in the bailout bill fell short of what he thought was necessary.

"If I had my way, I'd have gone further to force cuts in executive compensation," he said in a statement released after the provisions were added to the bill. But he said the measures "helped us get to agreement and are an important part of protecting taxpayer interests in this financial rescue plan."

Congress is used to legislating minimum wage, overtime regulations and other key issues at the lower end of the pay scale. The real value of having government wade into the debate over executive pay will depend on whether it leads to broader efforts at capping excessive compensation, said David Lewin, a professor at UCLA's Anderson School of Management.

"This is sticking a small toe in the pond -- not even the big toe," he said. "But if it's a marker to get this issue onto the legislative front in the future, then it could be far more important than it appears to be at the moment."

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