Treasury's new executive-pay regulations under the Troubled Asset Relief Program law will influence the compensation of far more individuals and far more companies than the small circle of senior executives within participating firms who are formally subject to those rules.
The limitations could hinder firms' ability to attract and retain top talent, warns an article Wednesday's Wall Street Journal. And they come at a time when most financial institutions were already set to pay sharply lower bonuses this year due to dismal financial results.
According to the Journal, companies that participate in the bailout program will be permitted to count only the first $500,000 of each specified senior executive's compensation as an expense for tax purposes. The rules outlined Tuesday also bar any exit payments for senior executives leaving "systematically failing" institutions that receive direct aid from the Treasury, require clawback of past awards under certain conditions, and say executives cannot be paid for taking "unnecessary and excessive risks."
The definition of the last phrase will be left to the judgment of the compensation committee of the board of directors at each participating firm, a Treasury Department spokeswoman told the Journal.
Ban on Golden Parachutes
The rules cover the chief executive, chief financial officer and the three other highest paid officers at participating institutions. However, "You are looking at a much larger section of the business community that will be subject to these executive-pay restrictions," compensation consultant Mark Borges, a principal at Compensia Inc., told the Journal. As a result, Wall Street's perennial challenge of keeping top performers from decamping to hedge funds or private equity firms looks to worsen.
Meanwhile, restricting exit payments or "golden parachutes" could have the perverse impact of enlarging salaries and bonus guarantees for newly hired executives, according to the Hay Group's top compensation consultant, Irving S. Becker. Alternatively, executives might demand conditional severance provisions, which become active only after their employer exits the government program.
Still, the limits apparently fall short of what Wall Street critics - who obviously constitute an overwhelming majority of the U.S. general public - had wished for. The public wanted individual executives' compensation at bailed-out firms to be capped by a specific dollar amount, according to Sarah Anderson, pay specialist at the Institute for Policy Studies, a respected left-wing think tank.