Human Capital & Careers

The Bailout Proposal Is Vague on Exec Pay

With regard to executive compensation, the devil will be in the as-yet-unspoken details.
David McCannSeptember 29, 2008

As lawmakers promised, the discussion draft of the proposed bailout bill now making its way through Congress contains tough talk about compensation limits covering the top five executives at financial firm that sells distressed assets to the government. But it is a very unspecific sort of talk.

Notably, the bill would include “limits” on financial incentives for executives “to take unneccessary and excessive risks that threaten the value of the financial institution.” No explanation was provided regarding either the criteria for determining what would constitute an unnecessary or excessive risk, or how it would be determined that an incentive was given for the purpose of taking such risks.

The legislation also would include a clawback provision applicable to bonus or incentive compensation based on “statements of earnings, gains, or other criteria” later proven to be materially inaccurate. No further detail is given, including the process for how such proof would be determined.

More clear, perhaps, is a prohibition on “any golden parachute payment” during the period that the government holds an equity or debt provision in a financial institution.

All of those provisions would apply to the five executives whose compensation is required to be disclosed in regulatory filings.

And the provisions would apply to financial firms the Secretary of the Treasury determines should sell troubled assets directly to the government without seeking competitive bids.

In other cases the secretary may direct firms to put up for auction any assets they seek to shed. In such cases, if the government’s bid is selected, the golden parachute clause would not apply where the purchases of the assets are $300 million or less. Where the purchases exceed $300 million, the bill would prohibit any new employment contract that provides a golden parachute “in the event of an involuntary termination, bankruptcy filing, insolvency, or receivership.”

The legislation also would limit the tax deductibility for compensation expenses to $500,000 per executive annually at financial firms that sell troubled assets to the government via an auction for more than $300 million. That is half the amount that all other public companies currently can deduct under IRS Section 162(M).

That provision would apply to the firm’s CEO, CFO, and anyone else who is among its three most highly compensated executives.