Focus on U.S. Executive-Pay Limits Shifts to Implementation

The Obama administration signaled some flexibility on executive-pay restrictions passed by Congress, while a leading lawmaker warned that concessions to bailed-out banks are likely to be few and far between.

Senior White House adviser David Axelrod said on Fox yesterday that both Treasury Secretary Timothy Geithner and Obama economic adviser Lawrence Summers had conveyed their concerns on the measure to key lawmakers. He said the administration will work with Congress to "come up with an appropriate approach" on the issue.

Meanwhile, House Financial Services Committee Chairman Barney Frank said the new executive-pay limits "will be enforced" and the Obama administration must "be tough" on executive compensation.

Executives currently have a "perverse incentive" where they don’t lose anything when their companies fail, Frank, a Massachusetts Democrat, said on CBS’s "Face the Nation" program.

The administration pledged to work with Congress on implementing tough executive-pay limits as critics said the new restrictions in economic-stimulus legislation will prompt talented managers to leave.

The limits, championed by Senate Banking Committee Chairman Christopher Dodd, were tucked into the $787 billion fiscal stimulus bill approved Feb. 13 by Congress. President Barack Obama plans to sign the stimulus bill into law Feb. 17 in Denver, said his spokeswoman, Jen Psaki.

'Technical' Changes

The administration sought to make "technical" changes in the executive-pay restrictions before the plan was approved by Congress, Psaki said Feb. 14 in an e-mailed statement.

Administration officials wanted to keep the executive- compensation measures as part of the financial-sector rescue package, according to a person familiar with their views. The administration decided not to fight Dodd’s provision because of the possibility it would have to go back to Congress for more bailout funds, the person said.

The administration will have roughly a year to determine how the pay restrictions are implemented.

Nell Minow, an expert on corporate governance who founded and edits the Corporate Library, said the legislation is "closely drafted" and may require "corrective legislation" to dial back some of the restrictions. "It could be months" before anything is drafted, she said. In the meantime, she said, she would urge Geithner to summon the compensation boards of banks receiving funds from the Troubled Asset Relief Program to discuss how companies will live within the new rules.

Boards of Directors

"He’s got to get the boards of directors on board," she said. "He should say, 'these are the rules we have now -- are we going to work together to work with it?'"

While Frank was talking tough on one network, Axelrod was striking a more conciliatory tone on another.

The concerns of the White House "are at the margins," Axelrod said. "We all have the same goal. We all have the same sentiment, and we want to do something that’s workable and will work with them to get to that point."

"The president has been very clear that he shares the outrage that most Americans feel about the spectacle of gaudy bonuses for executives at firms that are getting extraordinary assistance from American taxpayers," he said.

Some of Congress’s provisions go beyond the $500,000 cap announced by Obama last month, by restricting bonuses for senior executives and the next 20 highest-compensated employees at companies that receive more than $500 million from the Treasury Department’s TARP. It limits bonuses and other incentive pay at companies on a sliding scale according to how much federal aid they receive.

'Lifeblood' of Income

"The soon-to-be-law prohibits paying commissions, which are the lifeblood of a salesperson’s income," said Scott Talbott, vice president for government affairs at the Financial Services Roundtable, a Washington trade group that lobbies on behalf of banks. "Non-TARP companies, like hedge funds and foreign firms, don’t have this restriction, so it will be easier for them to hire the top producers away."

Obama, 47, called bonus payouts at banks receiving federal aid "shameful" on Feb. 4 when he announced the government would require financial companies getting aid in the future to cap compensation of top officials at $500,000 a year.

Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. each received $25 billion from TARP, the biggest beneficiaries of the program that injected $195.6 billion in more than 330 U.S. banks as of Feb. 10, according to a Treasury report.

Complaints Dismissed

Dodd dismissed complaints that the provisions would spur talented managers to leave companies subject to the restrictions.

"Some very high earners will have to adjust compensation expectations and maintain a different sense of proportion than in the past," Dodd said in a statement Feb. 14. "The current job market should deter employees from leaving, and if they do, there are many qualified replacements."

Earlier, the senator defended Congress’s restrictions as a proper response to reports of excesses at banks that received federal aid, including the award of a combined $121 million to four executives at Merrill Lynch & Co. just before the company was acquired by Bank of America Corp.

Under the legislation’s sliding scale, companies receiving between $250 million and $500 million from TARP would face restrictions on their senior executive officers and their next 10 highest-paid workers. The limits would apply to the top five employees at companies receiving between $25 million and $250 million.

Highest-Paid Employee

The bonus restrictions would apply only to the single- highest paid employee of companies receiving less than $25 million in aid.

The original bill applied the limit to the top 25 officials at all TARP recipients, according to an administration official, speaking on condition of anonymity. Dodd adopted the sliding scale after administration officials expressed concern that the provision would punish executives at small community banks, the official said.

Obama’s administration was concerned about another provision allowing banks that receive stimulus money to pay it back without getting a similar amount of funds to replace it from private sources, as Treasury requires, the administration official said. Paying back the money without getting private funds to replace it wouldn’t aid the flow of credit, the official said.

The administration considers its plan stricter in the sense that it would cap total compensation for affected executives at $500,000, while Congress’s plan would impose limits only on bonuses, not executives’ salaries, the official said.

'Exceptional' Assistance

Congress’s rules also would go beyond the White House plan by giving shareholders in all companies, not just those receiving "exceptional" assistance, an annual non-binding vote on executive compensation.

The Dodd amendment requires the Treasury Department to review past compensation for the top 25 employees of TARP recipients to determine if it is "contrary to the public interest."

The plan requires TARP beneficiaries to create a companywide policy regarding "excessive or luxury expenditures" such as corporate jets, entertainment and "other activities or events that are not reasonable expenditures for staff development."

Talbott said the limits in the stimulus plan may backfire by making U.S. banks in need of assistance less likely to seek it.

"It will make TARP less attractive and therefore reduce participation by healthy institutions, which undermines the whole program," Talbott said.

Unwanted Surprises

The government’s power to retroactively change the agreement creates the possibility of more unwanted "surprises" that will encourage banks to leave the TARP program before they’re healthy, said Bert Ely, chief executive officer of Ely & Co Inc., a consulting firm in Alexandria, Virginia. The best bankers may be recruited away by rivals who aren’t subject to the U.S. pay curbs, he said.

While the administration’s plan would limit executive pay, it would permit additional compensation in the form of restricted stock that can’t be sold until taxpayers have been paid back with interest.

Obama’s plan superseded restrictions in the TARP legislation that relied on tax penalties to make excessive pay unattractive. That law was criticized for being too weak.

Banks including KeyCorp of Cleveland, U.S. Bancorp in Minneapolis, Comerica Inc. in Dallas and PNC Financial Services Group Inc. in Pittsburgh and American Express Co. are among 29 lenders that received more than $500 million and are subject to tougher pay restrictions.

Treasury reports showed Associated Bank-Corp in Green Bay, Wisconsin; Popular Inc. in San Juan, Puerto Rico; and Synovus Financial Corp. in Columbus, Georgia, also would be under the new pay rule.

(Published by Bloomberg - February 16, 2009)