Risk Management

Beyond the Bailout

Are limits on executive compensation for banks that accept federal funds just the first wave in a future sea of pay measures?
Alix StuartDecember 1, 2008

The juggernaut that is executive pay seemingly hit a roadblock when Congress wrote compensation limits into the Emergency Economic Stabilization Act. As regulators wrangle over how to enforce these boundaries at banks, a bigger question looms: What do they mean for everyone else?

Not much, say some. “What we have is a symbolic gesture,” since none of the measures are new and most have big loopholes, says Paul Hodgson, senior research associate with The Corporate Library, an independent corporate governance research firm. “I can’t see it having a wider effect.”

Others, though, view the limits as a small first step toward a much broader array of corporate-governance measures designed to give shareholders more power over executive pay. “We’re fully expecting some form of shareholder bill of rights to come out within the first 100 days of Obama’s Administration,” says Patrick McGurn, special counsel to proxy advisory firm Riskmetrics. A mandatory shareholder vote on executive compensation (or “say on pay”) is a given for that bill, he says, with strong support from House Financial Services Committee chairman Barney Frank (D–Mass.), but other measures, like proxy access and limits on golden-parachute severance packages, could be addressed as well.

Steve van Putten, a practice leader at Watson Wyatt Worldwide, pegs the current $500,000 cap on the tax deductibility of exec-comp packages as likely to be targeted. “It could be a big revenue-raiser for the government,” since many companies will ignore the cap and simply pay the higher taxes, he says. Already, banks are barely blinking at it. “I thought it would be a show-stopper, but our clients are saying it doesn’t matter,” says James Bristol, a partner at Waller Lansden Dortch & Davis specializing in executive compensation.

To be sure, some companies have taken a proactive approach. JCPenney, among others, recently announced plans to lower severance multiples in future executive contracts. Provisions to claw back performance-based pay are also increasing: they are in effect at 64 percent of Fortune 100 companies, according to Equilar, up from 42 percent last year. Still, “you can’t pay less than a competitive wage,” says van Putten. He expects little change to base salaries or bonuses for CFOs in particular, as they have become “even more important” in the current environment.

Bailout vs. Payouts

According to new rules, firms receiving federal bailout funds must:

1) Ban golden parachutes in any future contracts

2) Take back bonuses based on any earnings that later prove inaccurate

3) Scrutinize incentives to make sure they do not encourage “excessive or unnecessary risk-taking”

4) Accept a corporate tax deduction capped at $500,000 per executive, including performance-based compensation

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