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Obama to Set Executive Pay Cap

February 3, 2009 - by Donny Shaw

A couple of weeks ago, Congress began working on legislation to put more restrictions on the Obama administration’s use of TARP funds. The bill, the TARP Reform and Accountability Act was passed by the House, but never taken up by the Senate because Rep. Barney Frank, Sen. Chris Dodd and others chose to trust in Obama’s assurances that TARP would be run differently and not to legislate.

The New York Times is reporting tonight that the Obama administration is about to announce the steps they are taking that correspond to one area that was in the legislation – stricter executive compensation limits:

>The Obama administration is expected to impose a cap of $500,000 for top executives at companies that receive large amounts of bailout money, according to people familiar with the plan.
>Executives would also be prohibited from receiving any bonuses above their base pay, except for normal stock dividends.
>Executives at companies that have already received money from the Treasury Department would not have to make any changes. But analysts and administration officials are bracing for a huge wave of new losses, largely because of the deepening recession, and many companies that have already received federal money may well be coming back.
>Crucial details remained unclear on Tuesday night, including whether the restrictions would apply to all companies that receive money under the so-called Troubled Asset Relief Program, or TARP, or whether they would apply only to the “exceptional” companies that were being rescued from collapse.

This appears to be stronger in some ways – and weaker in others – than what the Administration would have been required to do had Congress proceeded with the legislation.

The TARP Reform and Accountability Act would not have required a strict cap on executive salaries. This is where the Obama plan seems to be stronger.

On the other hand, the legislation would have applied its strict limits on bonuses and incentives retroactively to executives in financial firms that received TARP money before the new policy was put in place. It also would have applied to the 25 most highly compensated employees of a company and required the executives to get rid of any private airplanes they own.

There are several other areas addressed by the legislation that the Obama administration has yet to act on – new reporting and disclosure requirements for TARP recipients, using some of the TARP money for foreclosure mitigation, etc… We’ll be watching to see what the Obama administration chooses to do in these areas in lieu of the legislation.

UPDATE:memeorandum has more commentary.

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