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Stopping Future Bonuses

March 30, 2009 - by Donny Shaw

While the 90-percent bailout bonus tax bill has basically stalled out in the Senate, there’s a new bill coming to the floor of the House this week that is designed to block future bonuses – like the $1 billion in AIG bonuses scheduled for later this year – from being paid out. House Progressive Caucus member Rep. Alan Grayson [D, FL-8] is teaming up with New Democrats member Rep. James Himes [D, CT-4] on a bill, the Pay for Performance Act, to freeze executive bonuses at companies receiving bailout money until they are in a position to start repaying the government.

Here’s Rep. Grayson [pictured] on the principles behind the bill:

“This bill is based on two simple concepts. One, no one has the right to get rich off taxpayer money. And two, no one should get rich off abject failure,” Congressman Grayson said. “An economy in which a bank executive can line his own pocket by destroying his company with risky bets is an economy that will spiral downwards. And a government that hands out money to such executives is a government that fails to protect the taxpayers.”

The bill would prohibit financial institutions that have received federal bailout money from paying out “unreasonable or excessive” bonuses to any executive or employee under any pre-existing contracts, or from entering into new bonus contracts.

How is “unreasonable or excessive” defined in the bill, you may ask? Well, it’s not. But the bill directs the Secretary of the Treasury to establish the definition of an unreasonable or excessive bonus for the purpose of carrying out the prohibition. To help the Treasury set the new rules, the bill provides four standards that financial institutions should be required to consider when determining whether or not they can pay out a bonus or negotiate a new bonus contract under the new rules:

(i) the stability of the financial institution and its ability to repay or begin repaying the United States for any capital investment received under this title;

(ii) the performance of the individual executive or employee to whom the payment relates;

(iii) adherence by executives and employees to appropriate risk management requirements;

(iv) other standards which provide greater accountability to shareholders and taxpayers.

So, this is the essentially the third (and strongest) attempt to get the Treasury to make rules to block bailed-out companies from paying big executive bonuses. The first, included in the original Bush-Paulson bailout bill, failed. The second, contained in Barney Frank’s TARP Reform bill and transformed into a voluntary effort from the Administration didn’t stop the AIG bonuses. Will the public sentiment post-AIG bonuses help the Treasury make strong and effective rules that actually block taxpayer-funded executive bonuses at failing companies?

The bill was approved by the House Financial Services Committee last week by a vote of 38-22. It is scheduled from consideration from the House this week, probably on Wednesday.

UPDATE: This amendment (.pdf) from Rep. Brad Miller [D, NC-13] that was approved during the Financial Services markup appears to be aimed at helping the Treasury create strong new rules:

Page 2, line 22, after “Secretary” insert “, in consultation with the Chairperson of the Congressional Oversight
Panel established under section 125,”.

Page 3, line 6, after “Secretary” insert “, in consultation with the Chairperson of the Congressional Oversight Panel established under section 125”.
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