Executive Pay Limits May Prove Minimal
Lawmakers Hail Plan, but Analysts Question Its Impact

By Lori Montgomery
Washington Post Staff Writer
Wednesday, October 15, 2008

With the nation's largest banks set to receive an unprecedented infusion of public funds, lawmakers boasted yesterday that the top executives will for the first time face federal limits on their multimillion-dollar pay packages. But outside analysts and the banks themselves said the new limits are unlikely to significantly reduce anyone's paycheck.

The $700 billion Wall Street rescue plan Congress approved less than two weeks ago does little to limit overall compensation, which averaged $22 million last year among chief executives at the first nine banks that will accept public money under the program.

The law does ban "golden parachute" payments to departing executives under certain circumstances. But Treasury officials said yesterday that the nine banks and any others that decide to participate in its $250 billion capital purchase program will be permitted to offer senior managers severance packages worth up to three times their average annual earnings. That is an extraordinary sum in most cases, according to compensation consultants.

The most effective penalty, analysts said, may be a provision that bars firms from deducting from their taxable income more than $500,000 a year for compensation paid to their top five senior executives. Current law allows virtually unlimited deductions. But that provision, analysts said, is more likely to increase the cost of doing business than to cut executive pay.

"The $500,000 limit is going to have a bite. But it doesn't mean they can't pay people more than $500,000. It just means it won't be deductible," said compensation consultant Brian Foley of Brian Foley & Co.

During negotiations with Congress over the bailout plan, Treasury Secretary Henry M. Paulson Jr. fought hard against limiting executive pay, arguing that the restrictions would reduce participation. Lawmakers from both parties insisted that limiting excessive paychecks was essential to building support for a Wall Street bailout.

Yesterday, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he is satisfied with the provisions and vowed to push legislation to apply them more broadly when Congress convenes under a new administration next year.

"Look, I would have written them a little tougher," Frank said. But, he added: "This is the first time in American history that the federal government has imposed restrictions on executive compensation that goes to top executives."

Under proposed regulations released by the Treasury yesterday, limits on executive pay would vary depending on the degree of taxpayer assistance a company receives.

All firms that participate in the bailout plan would be subject to new limits on tax deductions for executive compensation.

Managers at firms that sell tainted assets to the Treasury would face no limits on pay and no limits on severance packages, although they would be subject to additional taxation. Golden parachutes would be banned for new hires.

For the most distressed firms that require extensive taxpayer investments to survive, severance packages would be banned entirely and executives would be sent off with no more than their final paychecks. Bonuses based on inaccurate financial reports would have to be returned and the Treasury would bar incentives that encourage "unnecessary and excessive risks that threaten the [firm's] value." Treasury officials have no immediate plans to define excessive risk.

Banks that sell stock to the Treasury would fall somewhere in the middle. The limits on bonuses and incentives for risky behavior would apply, but severance packages of less than three times annual earnings would be permitted.

Several lawmakers seemed confused about that decision. After meeting with Paulson yesterday, Christopher J. Dodd (D-Conn.), chairman of the Senate banking committee, said he understood the capital purchase program would have "stringent executive compensation requirements," including a ban on severance packages.

"The idea that we would allow golden parachutes or excessive compensation at a time when taxpayer money is being used to inject confidence in these institutions and to provide confidence, I think, would be a tragic mistake," Dodd said.

Lawmakers were able to claim a small victory yesterday. As recently as this weekend, Treasury officials were planning to apply the less stringent standard for asset sales to their new capital purchase program.

Key lawmakers objected. Senate Finance Committee Chairman Max Baucus (D-Mont.) spoke to Treasury officials over the weekend, while Frank and House Speaker Nancy Pelosi (D-Calif.) spoke to Paulson on Monday.

"Treasury hates any limits on executive compensation," said Sen. Charles E. Schumer (D-N.Y.). "But [Paulson] is learning political realities the hard way, and he realizes this is very, very important to not just the Senate and the House, but to the American people. And he's going to have to swallow some things he doesn't like."

Staff writers Paul Kane, Amit Paley, David Cho, Binyamin Appelbaum and staff researcher Julie Tate contributed to this report.