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Will the Executive Compensation Limit be Effective?

September 24, 2008 - by Donny Shaw

So there seems to be some general agreement that whatever bailout bill Congress passes should place a cap on the salaries executives at companies that sell their troubled assets to the government can receive.

“The American people are angry about executive compensation and rightfully so,” Treasury Secretary Paulson (pictured at right) said to the House Financial Services today. “We must find a way to address this in the legislation, but without undermining the effectiveness of this program.”

Paulson’s original bailout proposal doesn’t include any kind of a cap on executive pay and his statement today at the Financial Services hearing is entirely vague. So, what kind of executive compensation measure is Paulson ready to accept and what does he thinks would undermine the bailout?

Both Chris Dodd’s (D-CT) draft bill authorizing the Treasury Department to buy mortgage-related assets and Barney Frank’s (D-MA) draft Troubled Asset Relief Act of 2008 call for the Secretary to require all bailed out companies to meet “appropriate standards” for executive compensation. They both give similar outlines describing what they think “appropriate” is – here’s that language from Dodd’s bill:

>a. limits on compensation to exclude incentives for executives to take risks that the Secretary deems to be inappropriate or excessive;
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>b. a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate; and
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>c. such limitations on the entity paying severance compensation to its senior executives as are determined to be appropriate in the public interest in light of the assistance being given to the entity.

Note that interpretation here is ultimately left up to Paulson. The big news tonight is that a final deal between Congress and the Administration on the bailout has nearly been reached. Asked about the contents of the deal, Barney Frank said, “I know we have to do something about CEO compensation. House and Senate Democrats have some good agreement on this.” He added, “We are going to say no golden parachutes.”

With Paulson’s reservations about a salary cap undermining the effectiveness of the bailout, he may be willing to accept this vague language from the Democrats’ bills and execute it half heartedly, allowing executives to skirt the rules and find new ways to make just as much money. Not “golden parachutes,” but something else.

Barney Frank’s bill includes this language and goes further. It proposes an additional approach to executive compensation that doesn’t leave the important decisions up to the Treasury Secretary. Instead it gives power to shareholders. Frank’s draft version of the Troubled Assets Relief Act would allow shareholders or groups of shareholders holding a 3 percent stake in a company that participate in the bailout to nominate and elect new members to the board of directors at any time. It would also give all shareholders the ability to cast a symbolic, non-binding vote suggesting the level of compensation to be paid to executives.

But the strongest suggestion for limiting CEO salaries at bailed out companies has actually come from John McCain (R-AZ). At a press conference on Tuesday he said, “the senior leaders of any firm that is bailed out should not be making more than the highest-paid government official.” That would mean a $400,000 salary cap – the amount paid to the President of the United States. It’s not a serious legislative proposal. The administration would never sign off on it, and members of Congress who aren’t running for President know this and didn’t even bother putting anything like it in their draft bills. But short of a prescriptive approach like McCain suggest, it doesn’t look like the bailout plan is going to guarantee that the CEOs putting $700 billion from taxpayers at risk will take a pay cut at all.

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