Obama caps executive pay tied to bailout money
Thursday, February 5, 2009
WASHINGTON -- Assailing out-of-touch corporate pay and perks, President Obama on Wednesday put a salary cap on top executives from companies that want bailouts -- but it's a limit that could end up thinning the wallets of only a small number of people.
Obama's action comes as many Wall Street high-fliers receive big-dollar bonuses even as their firms draw public help for survival. The outcry has grown with each report of a bailed-out company that plans to buy a jet or hold a Las Vegas retreat.
The president aimed for a target -- extravagant corporate behavior on the public dime -- that fit the mood of the day. His $500,000 salary limit on executives from a limited number of companies was part of a broader assault on what he called a "reckless culture" that has helped damage the economy.
"We don't disparage wealth. We don't begrudge anybody for achieving success. And we believe that success should be rewarded," 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."
Top business leaders often receive annual packages worth several million dollars.
Yet in practical terms, the intervention into the corporate world is also limited.
The compensation cap covers distressed companies seeking special bailouts but would not apply retroactively to those that already have received them. Consultants on executive pay say the cap will probably apply only to a few executives -- not big-time traders, brokers and salespeople who routinely earn big pay packages. And there are sure to be efforts to find loopholes.
Had the salary cap been in place when the $700 billion bailout program began, it probably would have applied only to executives at five companies that have received so-called exceptional help: Chrysler LLC, General Motors Corp., American International Group Inc., Bank of America Corp. and Citigroup Inc.
Going forward, the compensation cap would also apply to other banks that receive more broadly available aid -- but they could get around it by disclosing their plans and involving shareholders in the decision. Some 360 companies have received such aid. The cap does not apply to them retroactively, either.
Beyond imposing tighter rules on companies that get emergency bailouts, the plan also requires more openness and limits for healthy banks that tap into public money to expand lending. And it envisions broad reforms in how employees are paid at any public financial institution, even ones that don't get federal help.
The new treasury secretary, Timothy Geithner -- confirmed last week despite controversy over his own tax problems -- said the raft of new policies is intended to restore the public's trust.
"There is a deep sense across this country that those who were not responsible for this crisis are bearing a greater burden than those who were," he said in announcing the details with Obama.
The half-million-dollar salary cap would apply to institutions that negotiate agreements with the Treasury Department for "exceptional assistance." That means those companies that get their own specialized help, beyond what is generally available through other financial shore-up programs.
Such firms could pay senior executives more than $500,000 only by using stock that could not be sold until the government gets paid back. Administration aides said trying to impose the salary cap retroactively would pose both legal and practical problems.
As for a bigger category of generally healthy institutions that get federal help, they would also face the $500,000 limit for senior executives. But in their case, the cap can be waived with full public disclosure and a nonbinding shareholder vote.
Timothy J. Bartl, vice president and general counsel for the Center On Executive Compensation, said the president's actions involve a special 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.
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 bailout fund that Congress created last year.
Obama chose blunt language, chiding a "culture of narrow self-interest," golden parachute severance packages that "we've all read about with disgust," and the "reckless culture and quarter-by-quarter mentality" that he said has wreaked havoc. He has been particularly angered by a report last week that employees on Wall Street received more than $18 billion in bonuses last year while their eroding financial sector got a massive bailout from taxpayers.
The firms getting "exceptional assistance" from the government would face stronger rules on employing deceptive practices; stricter limits on golden parachutes; more disclosure on their salary plans and a requirement that their boards adopt policies on luxury spending items.
The other firms getting public aid will face a version of those same rules.
The administration also will propose long-term compensation ideas even for companies that don't receive government assistance, Obama said. Among the ideas will be requiring top executives at financial institutions to hold stock for several years before they can cash out.
Associated Press writer Jim Kuhnhenn contributed to this story.