Obama Calls for Executive Pay Limits

Responding to public outrage over the level of executive pay at financial firms that have benefited from federal bailout money, President Barack Obama on Feb. 4 announced a $500,000 limit on pay for top executives at firms that receive "exceptional" government help in the future. He also called for an accounting of perks and luxuries given to executives as well as limits on bountiful "golden parachute" severance packages.

Obama, speaking at the White House with Treasury Secretary Timothy Geithner at his side, took a tough line on executive pay, saying executives are being rewarded for failure. "It's not just bad taste, it's bad strategy," Obama said. He called for "restraint" in return for federal aid.

Pay the U.S. Back First

Obama said any compensation that exceeds federal limits would have to be issued as stock that can't be paid out until the government is paid back for its assistance. The plan would also expand the number of top executives subject to "clawback" provisions on bonuses and incentive pay if they were obtained through deceptive practices.

While concern about executive pay has simmered for some time, the issue moved to the front burner in late January following a report that Wall Street firms paid out an estimated $18.4 billion in bonuses even as the financial industry was imploding. At the time, Obama called the bonuses "shameful" and "the height of irresponsibility."

The plan announced Wednesday differentiates between banks that participate in government programs available to all banks and those that have received "exceptional assistance," such as AIG (AIG), Bank of America (BAC), and Citigroup (C). Only those companies that receive the exceptional assistance face more stringent limits on pay and restricted stock. They would also be required to disclose executive compensation "structure and strategy" and submit the plans to nonbinding shareholder resolutions.

However, the many banks—now totaling roughly 360—that have received capital injections from the Treasury under the widely available "TARP" program would not necessarily face the stricter pay limits; shareholders can vote to waive the pay restrictions in their cases. None of the restrictions will be retroactive, either; there will be no clawbacks of bonuses already granted at troubled companies that have received government funds. But Administration officials clearly hope that by making an example of the most troubled companies that come to Uncle Sam with hat in hand, other banks will also adopt more restrictive practices.

Cracking Down on Corporate Perks

The new restrictions, which only apply to recipients of future government assistance, would also curb corporate luxury expenditures such as corporate planes, lavish renovations, and parties and conferences at companies receiving "exceptional assistance" by requiring company boards to adopt companywide policies on such spending and to post them on corporate Web sites.

One top Administration official referred to this as the "name and shame provision." While conceding that it is virtually impossible to define such behavior in advance—and that companies need to spend money on marketing, sales trips, and other things aimed at boosting revenues—they hope to rein in excessive spending by making it more transparent. When companies are doing the sorts of things they are doing now, like five-day junkets to the Super Bowl, the official adds, "You'll know it when you see it."

Obama also called for longer-term actions designed to bring pay strategies into line with "sound risk management and long-term growth."

He also clearly wants to move toward adopting controversial "say on pay" provisions more broadly. Such provisions, which would grant shareholders a vote on executive pay packages in the future, have long been vehemently fought by Corporate America. Obama backed legislation in the Senate that would have required publicly traded U.S. corporations to adopt say-on-pay. The new proposals would require that companies accepting government funds allow shareholders to vote on pay packages.

Administration officials clearly see this as just a first step. "There's no reason that this could not apply more broadly throughout our system," says the official.

While the executive pay proposals are likely to be welcomed by a public wary of job losses and pay cuts during the recession, not all experts agree they are a good idea.

"It's ill-advised, if not a disaster," said Steve Kaplan, a finance professor at the University of Chicago Booth School of Business. "If it's very broad, as soon as they can, the best people will leave. The more people this cap affects, the worse it will be."

Administration officials dismissed those concerns, however. "It would be self-defeating to make it impossible for [the banks] to hire," says one. Given that restrictions will only apply to "firms that are very much relying on the taxpayer for stability and the hope of recovery," he adds, that's simply not something officials are worried about.

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