Thursday, February 5, 2009
Obama Lays Out Limits on Executive Pay
Firms That Get Bailout Funds Face $500,000 Salary Cap, Must Disclose Luxury Purchases; A Move to 'Claw Back' Bonuses By JONATHAN WEISMAN and JOANN S. LUBLIN WASHINGTON -- President Barack Obama laid out strict new regulations on executive compensation Wednesday, strafing Wall Street with tough talk as Washington asserts increasing control over a financial sector seeking more government funds. How New Rules on Exec Pay Impacts Big Business 3:35 President Barack Obama's unveiled new rules on executive pay caps and expense disclosure. WSJ's Jonathan Weisman speaks about what effects this could have on big business. The plan, which represents the most aggressive assault on executive pay by federal officials, includes salary caps of $500,000 for top executives at firms that accept "extraordinary assistance" from the government. It also restricts severance packages, known as "golden parachutes," for dismissed executives and requires the disclosure of policies on so-called luxury spending on things such as holiday parties, corporate jets and office renovations. The administration called the latter part of the initiative the "name and shame" provision, designed to make companies think twice about indulgent outlays. New Rules For companies receiving "exceptional" financial assistance: -Limit senior executives to $500,000 in total pay -- other than restricted stock -Restricted stock vests when government has been repaid -Executive pay must be subject to nonbinding shareholder resolution -Require provisions to clawback bonuses for top executives engaging in deceptive practices -Increase ban on golden parachutes for senior executives -Require board adoption of company policy relating to "luxury expenditures"All details "This is America," the president declared at the White House. "We don't disparage wealth. We don't begrudge anybody for achieving success. And we believe success should be rewarded. But what gets people upset -- and rightfully so -- are executives being rewarded for failure, especially when those rewards are subsidized by U.S. taxpayers." The rules do not apply retroactively, not even to those firms that have already been bailed out. But they will be imposed on all companies -- in the financial, auto or other sectors -- receiving any future help. This includes those that have received assistance already. As Mr. Obama prepares to lay the groundwork for the second phase of government assistance, his tough stance on pay may help build support from a Congress weary of bailouts. Next week, Treasury Secretary Timothy F. Geithner is expected to unveil the specifics of a plan that seeks to rid banks of some of their toxic assets while offering insurance on other holdings weighing down their balance sheets. Corporate directors and the consultants who advise them say the government's increasingly tough stance -- which began with more limited restrictions in September's bailout legislation -- is shifting discussions inside boardrooms toward limiting pay at companies untouched by the bailout. More Immelt Opposes Pay CapsPlan Poses Dilemma for GOPMean Street: Why Capping Pay Won't WorkObama's remarks Treasury's detailsPodcast: University's of Chicago's KaplanBankers Mixed on Obama's Pay-Cap PlanHeard on the Street: The Problem With Obama's Pay CapsReal Time Econ: New Rules Provide Political CoverDeal Journal: Fighting Over Shrinking BonusesOpinion: Wall Street Bonuses Are an OutrageQuestion of the Day Vote: Should the government be able to limit pay for executives at companies receiving federal aid?Yes NoJoin the discussion in the Journal Community."The context of compensation has changed" as a result of the federal bailout, says Arthur C. Martinez, chairman of the board compensation committees at Liz Claiborne Inc. and PepsiCo Inc. and a former chief executive of Sears, Roebuck & Co. Boards realize they can't "reward behavior that doesn't also reward shareholders," he adds. "That's on everybody's lips right now." Treasury officials and the White House, after what one official described as "a little push and pull," tried to strike a delicate balance, hoping to take the hardest possible line on executives without scaring institutions away from accepting assistance. The initiative divides beneficiaries into two categories. The first includes companies needing "exceptional assistance" -- such as Bank of America Corp., Citigroup Inc. and insurance giant American International Group Inc. -- which received specially designed rescues of their own. The second group encompasses firms that seek assistance through generally available programs, like the government's capital-injection effort under the Troubled Asset Relief Program. The planned second installment of the $700 billion financial rescue package is set to be unveiled next week. View Full Image Associated Press President Barack Obama speaks about executive compensation Wednesday. His plan will put a $500,000 limit on compensation at companies seeking federal assistance. Restricting Bonuses on Wall Street 3:15 The furor over rich bonuses paid out by banks and brokerages is triggering political action. Columnist Simon Constable discusses the issue with commentator John Batchelor. (Feb. 4) Unlike the rules for "exceptional" institutions, the regulations for firms taking generally available rescue funds will be subject to a brief public comment period, during which time they could be slightly altered. The final rules should be adopted by Treasury "within weeks," a Treasury aide said. Some Treasury officials warned against going too far, arguing the rules could discourage healthy banks from participating. White House Chief of Staff Rahm Emanuel wanted the $500,000 salary cap, a White House official said. Dividing the rules between regular recipients and those receiving "exceptional" help was the compromise. The administration imposed the toughest rules on the "exceptional institutions," figuring they won't be in a position to argue. Compensation for "senior executives" -- a term left undefined and subject to negotiation with Treasury -- would be capped at $500,000. Any pay above that would have to come as restricted stock, which could vest only after the recipient of bailout funds repays its debt to the government with interest. Such companies will have to disclose their executive compensation structures and submit them to shareholders for a nonbinding vote of approval. The top 25 officials of an "exceptional assistance" company could have their bonuses and other incentive compensation "clawed back" by the company if they knowingly provide inaccurate information that helped bolster their pay. The top 10 senior executives will be barred from any severance package if they are fired. The next 25 executives will be limited to a year's compensation upon termination. View Interactive Under the new plan, corporate boards will have to adopt companywide policies on luxury purchases, defined as expenditures for aviation services, office and facility renovation, entertainment and holiday parties, conferences and events. Chief executives will have to personally certify expenditures that could be viewed as luxury items, and expense policies will have to be posted on the Internet. For companies participating in generally available rescue programs, such as Treasury's capital-injection program, the rules are looser. The $500,000 salary cap can be waived with disclosure of compensation packages and a nonbinding shareholder vote. And under a less-restrictive "golden parachute" rule, the top five executives could get up to one year's compensation upon severance -- still tougher than the three-year limit in the existing bailout law. The compensation initiative risks crossing a line into the kind of government intervention that unnerves some voters. "I understand the mood of the country right now," says S. Phillip Collins, president and chief executive of Sound Banking Co., Morehead City, N.C., which received $3 million in bailout funds. But if executives are making money for shareholders, "they should be rewarded for it."