Obama Outlines Limits on Executive Pay

President Barack Obama on Wednesday imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money. Video by AP
By David Cho and Binyamin Appelbaum
Washington Post Staff Writers
Thursday, February 5, 2009

The Obama administration's announcement yesterday that it would toughen executive compensation restrictions at some firms receiving federal aid signaled a broader strategy to remake how Wall Street's top financiers are paid, officials said.

The administration imposed a $500,000 pay cap on senior officers at companies that need special government assistance. But perhaps more significant is a new rule that bans those firms from offering additional compensation except in the form of company stock that can be redeemed only after the government investment is repaid.

The idea is to motivate executives to work for the long-term health of their companies, administration officials said. While the new restrictions would only apply to a few firms under limited circumstances, officials said the rules were an important first step.

"We're going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks," Obama said yesterday. "We're going to examine the ways in which the means and manner of executive compensation have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system."

Broader executive compensation rules could already be on the way. House Financial Services Chairman Barney Frank (D-Mass.) said a consensus in Congress is building to give the Federal Reserve the authority to police threats to the financial system, including by limiting compensation awarded to corporate executives for excessively risky behavior.

Such restrictions would apply to all firms, not just those that accept government rescue funds, Frank said, and could include a requirement that senior executives lose money when they make a bad business decision instead of simply gaining money when their bets pay off.

In unveiling the restrictions on executive compensation, the administration outlined two sets of rules. One applies to companies that receive government assistance to avoid a failure that could damage the wider financial system and a second applies to the vast majority of companies that would receive bailout money by applying to a program established to help relatively healthy firms.

For companies getting massive assistance to prevent a wide collapse, the $500,000 cap on senior officer pay would be mandatory. So far the government has provided that kind of extraordinary aid to only a few companies, including American International Group, Citigroup and Bank of America.

Because the rules do not apply retroactively to any of the 359 banks that have received government aid, these three firms are not subject to the new restrictions. But administration officials said they expect the government will need to stage more such rescues as the financial system continues to deteriorate.

For the bulk of firms getting fresh government aid, the new limits would be voluntary. Companies could waive the restrictions by disclosing executive compensation publicly and, if requested, allow a shareholder resolution on the matter, though the results would not be binding.

This second set of rules for these firms is still subject to a public comment process and may change, officials said. A final policy may not be in place for several weeks.

Yesterday's announcement was part of an effort by Obama's economic team to address mounting public anger over the government's efforts to aid firms at the heart of the economic crisis. Treasury Secretary Timothy F. Geithner is set to detail that rescue effort Monday.

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