Stimulus package hits execs in the wallet

Executives at companies receiving federal assistance would face stiffer limits on bonuses and severance under the stimulus bill passed by the House today than they would under President Obama’s order earlier this month.
They would, however, face no salary cap under the legislation. The presidential order imposed a $500,000 limit on senior executives at several companies receiving extraordinary aid under the federal bailout.
The legislative limits also would extend to many more companies than would be affected under the Obama order, according to a copy of the final stimulus bill the House passed today. The Senate was expected to take it up tonight.
The Obama curbs were limited to a few companies such as Citigroup Inc. of New York, and Bank of America Corp. of Charlotte, N.C., while the legislation also would apply to the hundreds of banks receiving aid under the $700 billion bailout.
What is not clear is how the legislation, if passed by the Senate and signed into law by Mr. Obama, would jibe with the provisions of his executive order.
“To the extent that something in the law contradicts something in the executive order, the law will take precedent,” said Thomas Mann, an expert on the federal government who is a scholar at the Brookings Institution in Washington. “Otherwise, they may both be in force.”
The Department of the Treasury is due to issue specific rules implementing the stimulus legislation in the month ahead, though Mr. Obama could simplify its task by withdrawing his order, Mr. Mann said.
“For now, though, it’s all cloudy,” he said.
Senate Banking Committee Chairman Chris Dodd, D-Conn., sponsored the bill’s executive-pay provision.
“These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses,” Mr. Dodd said.
Bonuses could be paid only in stock that would vest after the financial institution repays its federal loan, the legislation says. The size of the bonus would be limited to a third of the executive’s total annual compensation.
Bonuses could be “clawed back” if they were found to have been paid on the basis of misleading public statements that inflated the value of the stock.
The average 2007 pay for chief executives at 200 large companies was nearly $12 million, with the vast majority of that compensation coming in the form of bonuses, according to industry studies.
Under the Obama order, the size of executive bonuses was not restricted, though they also had to take the form of long-term incentives that could vest only after federal aid was repaid.
A $400,000 executive pay cap and stiffer bonus curbs that passed the Senate were removed in conference between senior Senate and House members yesterday.
An amendment sponsored by Sens. Ron Wyden, D-Ore., and Olympia Snowe, R-Maine, would have penalized companies that paid bonuses greater than $100,000 to executives after getting bailout money.
The legislation prohibits severance packages for the top executives at firms getting federal aid. Obama plan prohibited any golden parachutes for top-10 executives that leave the company. Under the bill, each company getting more than $25 million in aid will have to establish a board compensation committee made up of independent directors to review employee pay at least semiannually.
“We applaud the absence of a salary cap which we think would restrict companies’ ability to keep employees they need to turn the companies around,” said Charles Tharp, executive vice president at the Center on Executive Compensation in Washington, which is funded by member companies.
Under the bill, the restrictions would apply to at least the 25 highest-paid employees at firms receiving more than $500 million, and to at least the 15 highest-paid executives at firms getting between $250 million and $500 million.
At firms getting between $25 million and $250 million in aid, the prohibition would apply to at least the five best-paid executives, and at firms receiving less than $25 million in aid it would apply to just the highest paid employee.
Among the companies that have received more than $500 million in aid are Citigroup Inc., American International Group Inc., Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, PNC Financial Services Group Inc. and US Bancorp Inc.
The legislation also would require all companies getting aid to submit executive compensation to an advisory shareholder vote, a requirement for all companies long sought by investor advocates.
The Treasury secretary also would have to review compensation paid to the top 25 employees of eachcompany that has gotten aid since the aid began last October retroactively.
If these payments were found to be “contrary to the public interest” or the purpose of the legislation, he could negotiate for reimbursement.
The board of any aid recipient must have a company policy for luxury expenditures such as corporate jets, entertainment and office renovations.
Citigroup recently canceled a $50 million purchase of a luxury jet from France after it became public.
The CEO and chief financial officer of each aid recipient also would have to provide written certification that their company is complying with the legislative requirements.