Goal of Obama's CEO pay cap: Make Wall St. accountable

WASHINGTON — President Barack Obama on Wednesday imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money. Americans, he said, are angry at "executives being rewarded for failure."

Obama announced the dramatic new government intervention into corporate America at the White House, with Treasury Secretary Timothy Geithner at his side.

"For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste, it's a bad strategy — and I will not tolerate it as president," Obama said. "We're going to be demanding some restraint in exchange for federal aid, so that when firms seek new federal dollars, we won't find them up to the same old tricks."

He said the pay limits are a first step, to be followed by the unveiling next week of a sweeping new framework for spending what remains of the $700 billion financial industry bailout that Congress created last year.

Outrage over bonuses, jets

The pay move comes amid a national outcry over huge bonuses to executives heading companies seeking taxpayer dollars to remain afloat. The demand for limits was reinforced by revelations that Wall Street firms paid more than $18 billion in bonuses in 2008 even amid the economic downturn and the massive infusion of taxpayer dollars.

Adding to the outrage was a flurry of reports that after taking taxpayer rescue funds, some big banks were still planning to purchase corporate jets, planned executive junkets to Las Vegas and Monte Carlo, or had spent millions of dollars on office renovations.

"This is America. We don't disparage wealth. We don't begrudge anybody for achieving success," Obama said. "But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers."

Said Geithner, "There is a deep sense across the country that those who were not ... responsible for this crisis are bearing a greater burden than those who were."

Details, and a loophole

Firms that want to pay executives above the $500,000 threshold would have to use stock that could not be sold or liquidated until they pay back the government funds.

But the new rules come with a big loophole: Generally healthy institutions that get capital infusions from the Troubled Asset Relief Program in the future will have more leeway. They also will face the $500,000 limit, but the cap can be waived with full public disclosure and a nonbinding shareholder vote.

Under the new plan, companies that seek new money from the Troubled Asset Relief Program or under a bank-specific negotiated agreement called "exceptional assistance" would face the following restrictions:

• The expansion to 20, from five, the number of executives who would face reduced bonuses and incentives if they are found to have knowingly provided inaccurate information related to company financial statements or performance measurements.

• An increase in the ban on golden parachutes from a firm's top five senior executives to its top 10. The next 25 would be prohibited from golden parachutes that exceed one year's compensation. Obama said massive severance packages for executives who leave failing firms are going to be eliminated. "We're taking the air out of golden parachutes," he said.

• A requirement that boards of directors adopt policies on spending such as corporate jets, renovations and entertainment.

"Close to being criminal"

Even some Republicans, angered by company decisions to pay bonuses and buy airplanes while receiving government help, have few qualms about restrictions.

"In ordinary situations where the taxpayers' money is not involved, we shouldn't set executive pay," said Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee.

"But where you've got federal money involved, taxpayers' money involved, TARP money involved, and the way they have spent it, with no accountability, is getting close to being criminal."

Broader look at corporate pay

As important as what Obama spelled out was the signal he sent that his administration would look at executive compensation beyond banks and Wall Street.

The president promised a look at a corporate culture that's rewarded top executives handsomely, while the income of workers, including those who are college graduates, has been largely stagnant for years.

"We're going to examine the ways in which the means and manner of executive compensation have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system," he said. "We're going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks."

The question of corporate governance already is on the agenda of Democrats, who favor "say on pay" legislation that would cap executive compensation at some level, say $5 million. Any executive compensation above the cap would have to be approved by shareholders.

On the face of it, this sounds like a populist measure to give small investors a say. However, institutional investors — mutual fund companies, pension fund managers and investors for endowments — often own large portions of a company's stock, and they would have more say on what executives should earn.

Obama's efforts are likely to empower consulting companies that currently weigh investment risks, including corporate governance issues such as executive pay, on behalf of institutional investors, said Jack Coffee, a law professor and expert on corporate governance at Columbia University in New York.

The Obama administration's push to let shareholders decide is likely to boost shareholder activism, Coffee suggested, but he predicted that executives in time would return to a higher pay structure.

"Right now, I doubt they will seek $20 million and 1 million shares tomorrow," he said, noting that eventually shareholders will take the advice of consulting firms and come upon an industry standard for performance-based pay. "I'm not sure that (bank) CEOs are always going to be paid less than 7-foot NBA centers."