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.
The president said the new rules were needed to curb Wall Street excesses that continued even after top companies accepted taxpayer help. Yet administration officials said they did not want to make the rules that apply to recipients of government aid too encompassing because they don't want to discourage companies from participating in government programs that are intended to promote bank lending to consumers and businesses.
President Obama last week criticized the billions of dollars in bonuses paid on Wall Street after a year of collapse and record-setting losses.
Citigroup, which received $45 billion in federal aid, was set to buy a $50 million corporate jet, but dropped the deal after being pressured by government officials. Former Merrill Lynch chief executive John Thain was criticized for lavishly redecorating his office at corporate expense; he later said he would reimburse the company. This week, Wells Fargo hurriedly canceled a corporate event in Las Vegas for its employees.
Such excesses are not financially significant for the companies, but they anger lawmakers and their constituents, making it harder for the administration to ask for the money it needs to stabilize financial firms. A wide range of economists and some government officials say Obama's team is almost certain to ask Congress for hundreds of billions of dollars in more rescue funds above the $700 billion authorized.
Administration officials also unveiled yesterday what they called a "name and shame" provision that requires companies taking financial funds to develop a policy in regards to corporate jets, furniture and other luxury items. The chief executive must certify the policy and put it on the Web site.
The moves were welcomed by lawmakers on both sides of the aisle. "If anyone is looking for the taxpayer to help bail their company out, these type of executive pay caps are appropriate," said House Minority Leader John A. Boehner (R-Ohio).
The announcement by Obama reverberated throughout Wall Street yesterday, from trading desks to corner offices. There was indignation that others responsible for the financial crisis, such as executives at credit rating agencies, were not facing pay restrictions, but also resignation that Wall Street must shoulder some responsibility.
"I understand why the government is doing this; I think a lot of people are outraged on Main Street," said one former Citigroup employee who now works at a boutique bank. At the same time, this person said, "We don't want to be a penny-wise and a pound foolish. We need to attract smart people. My fear is that we may not attract the necessary talent we need to see us through this type of crisis. $500,000 might be too low of an incentive to sign on."
Some compensation analysts said the executive compensation effort may not appease critics and many ordinary Americans who blame Wall Street's financiers for causing the crisis in the first place.
Rep. Brad Sherman (D-Calif.) said the plan had major "loopholes," partly because it did not impose mandatory conditions on all financial firms receiving government aid.
The government has also tried in the past to limit executive compensation. Federal tax law allows companies to deduct money they spend on compensation, since the employee pays taxes on that income. In 1993, Congress limited the deduction to $1 million per employee, effectively limiting executive pay. Experts on executive compensation generally credit that law with fueling the boom in stock options, as companies paid executives $1 million and then gave them millions of dollars in options to get around the tax restriction.
Yesterday administration officials also expanded a ban on new golden parachute agreements to a larger number of executives. More officers would also be subject to a "clawback" provision that would require them to return their bonuses if it is later discovered that the company misreported its financial results.
Under rules previously announced companies that receive "exceptional assistance" would be limited to paying shareholders a one-cent dividend. These firms would also be banned from using federal aid to buy other firms.
Staff writers Lori Montgomery and Tomoeh Murakami Tse contributed to this report.