President Barack Obama on Wednesday imposed a $500,000 cap on senior executive pay for the most distressed financial institutions receiving taxpayer bailout money and promised new steps to end a system of “executives being rewarded for failure.”
Obama announced the unusual government intervention into corporate America at the White House, with Treasury Secretary Timothy Geithner at his side. The president said the executive-pay limits are a first step, to be followed by the unveiling next week of a sweeping new framework for spending what remains of the $700 billion financial industry bailout that Congress created last year.
The pay limit comes amid a national outcry over huge bonuses to executives who head companies that seek taxpayer dollars to remain afloat. The demand for limits was reinforced by revelations that Wall Street firms paid more than $18 billion in bonuses in 2008 amid the economic downturn and the massive infusion of taxpayer dollars.
The limit would apply to top-paid executives at the most distressed financial institutions that are negotiating bailout agreements with the federal government. It also would apply to other banks that receive aid, but they could get around the limits by publicizing to shareholders plans to exceed the salary cap.
The limits would not apply retroactively to any bank that received money from the first half of the $700 bailout allocated by Congress. For example, the restriction would not apply to such firms as American International Group Inc., Bank of America Corp., and Citigroup Inc., that already have received such help.
But Obama touted the broad symbolism of his action.
“This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success,” Obama said. “But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers.”
“There is a deep sense across the country that those who were not ... responsible for this crisis are bearing a greater burden than those who were,” Geithner said.
Firms that want to pay executives above the $500,000 threshold would have to use stock that could not be sold or liquidated until they pay back the government funds.
Generally healthy institutions that get capital infusions from the Troubled Asset Relief Program in the future will have more leeway. They also will face the $500,000 limit, but the cap can be waived with full public disclosure and a nonbinding shareholder vote.
Obama said that massive severance packages for executives who leave failing firms are also going to be eliminated. “We’re taking the air out of golden parachutes,” he said.
Other new requirements on “exceptional assistance” will include:
- The expansion to 20, from five, the number of executives who would face reduced bonuses and incentives if they are found to have knowingly provided inaccurate information related to company financial statements or performance measurements.
- An increase in the ban on golden parachutes from a firm’s top five senior executives to its top 10. The next 25 would be prohibited from golden parachutes that exceed one year’s compensation.
- A requirement that boards of directors adopt policies on spending such as corporate jets, renovations and entertainment.
The administration also will propose long-term compensation restrictions even for companies that don’t receive government assistance, Obama said.
Those proposals include:
- Requiring top executives at financial institutions to hold stock for several years before they can cash out.
- Requiring nonbinding “say on pay” resolutions — that is, giving shareholders more say on executive compensation.
- A Treasury-sponsored conference on a long-term overhaul of executive compensation.
Compensation experts in the private sector have warned that intrusions into the internal decisions of financial institutions could discourage participation in the rescue program and slow down the financial sector’s recovery. They also argue that it could set a precedent for government regulation that undermines performance-based pay.
“One of the big questions is whether it will make it more difficult to recruit and retain executives at these companies,” said Claudia Allen, chair of corporate governance at the Chicago-based law firm of Neal, Gerber & Eisenberg.
The $500,000 cap “is a very tight limit,” she said.
Timothy J. Bartl, vice president and general counsel for the Center On Executive Compensation, said the president’s actions are a unique situation given the government’s role bailing out troubled institutions.
“We do not view it as something that ought to be extended beyond this circumstance,” he said.
On Capitol Hill, some lawmakers had been pushing for even stricter caps.
Sen. Claire McCaskill, D-Mo., and Sen. Bernard Sanders, I-Vt., have proposed that no employee of an institution that receives money under the $700 billion federal bailout can receive more than $400,000 in total compensation until it pays the money back. The figure is equivalent to the salary of the president of the United States.
Even some Republicans, angered by company decisions to pay bonuses and buy airplanes while receiving government help, have few qualms about restrictions.
“In ordinary situations where the taxpayers’ money is not involved, we shouldn’t set executive pay,” said Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee.
“But where you’ve got federal money involved, taxpayers’ money involved, TARP money involved, and the way they have spent it, with no accountability, is getting close to being criminal.”