by James Oliphant
An effort to curb executive pay at the nation's most troubled banks, inserted at the last minute into Congress' mammoth economic stimulus bill, has sparked an outcry from financial services groups and others who warn the caps could harm the government's efforts to revive the economy.
During final negotiations on the $787-billion package last week, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) slipped in a provision to limit bonuses for executives at institutions receiving government bailout funds to a third of their salaries. And the bonuses could be paid only in stock irredeemable until the government was paid back in full.
President Obama is expected to sign the stimulus into law Tuesday in Denver. But the White House and Senate Democrats could clash later over the executive pay caps if the White House seeks a legislative adjustment.
The limits go beyond those advocated by the Treasury Department and came as a surprise to Wall Street. Financial services experts are particularly troubled that the caps apply not just to senior executives but to traders, investment bankers, fund managers and others compensated largely through performance-based commissions.
Dodd's provision also would apply to the more than 350 firms that have received money from the Troubled Asset Relief Program launched by the Bush administration in the fall. It would affect senior executives and as many as 20 of the highest-paid employees of a participating firm.
"We expected compensation restrictions on TARP company executives, but not on the sales force," said Scott Talbott, head of government affairs for the Financial Services Roundtable in Washington.
Talbott and others warn the measure could trigger unintended consequences -- forcing companies to raise the salaries of executives and traders to dodge the lid on bonuses, for example, or driving talented employees to companies that aren't subject to the regulation or to overseas banks.
"This will make it difficult to attract and retain top salespeople, the lifeblood of any company," Talbott said.
The White House is concerned that the provision could prompt financial institutions to repay the government too quickly -- instead of extending credit or loans to consumers and businesses -- to retain and recruit top talent, according to a senior administration official. The goal of TARP, renamed the Financial Stability Plan by the Obama administration, is to get credit flowing again, to strengthen banks, and to provide aid for homeowners and for small businesses.
Dodd, for his part, argues that "the current job market should deter employees from leaving, and if they do, there are many qualified replacements."
Undeniably, his provision has political and populist appeal. Reports of lavish bonuses paid to top executives at Merrill Lynch & Co. and other firms that received billions in government aid angered Obama and other Democrats.
"Some very high earners will have to adjust compensation expectations," Dodd says, "and maintain a different sense of proportion than in the past."
The White House had proposed a cap of $500,000 on bonuses for executives and wanted the restrictions to apply only to institutions that take government money in the future. But Dodd's measure goes much further, leading to speculation that Obama could seek a change.
"As he has already expressed, the president shares a deep concern about excessive executive compensation at financial firms that are receiving extraordinary assistance from American taxpayers," White House spokeswoman Jennifer Psaki said in a statement Saturday. "He looks forward to working with Congress to responsibly address this issue. Members of the administration contacted members of Congress with suggested technical changes toward that end."
Dodd defended his plan by saying: "These bonuses are meant to be performance-based, but too often Wall Street executives took too many risks and made decisions for short-term gains, rather than long-term viability. A car mechanic or teacher in Bridgeport, Conn., should not be paying to subsidize bonuses for their bad decisions."
Graef "Bud" Crystal, an expert on executive compensation based in California, said Dodd's approach was too sweeping. The government should target those responsible for the troubles at Citigroup, JP Morgan & Chase Co. and other Wall Street titans, he said -- "the ones whose fingerprints are on the disaster."
Crystal says the provision could drain the kind of high-risk, high-reward talent that the nation's top financial firms need as they rebuild. "You are going to end up with civil-service types in there," he said.
That's "absurd," countered Sarah Anderson, a fellow at Washington's Institute for Policy Studies, which describes itself as a progressive think tank.
"First, in this economic climate, these guys should be happy to have a job -- period," Anderson said. "Second, we don't need people in these positions who are only concerned about how many zeros are on their paychecks. We need people focused on getting the country's economy back on track."
In fact, some attrition on Wall Street might be beneficial, she suggested.
"These are the guys who presided over . . . more than $1 trillion in U.S. financial losses. Do they really think foreign companies are eager to hire them?"
Comments
That's tough !! If they don't like it, let's bring them to trial and send them to prison. Maybe, then they will get the message. That is not your money, you are taking, it is ours, the taxpayers !! It's alright for you to limit what your workers make, though, isn't it !!? Those CEOs should have to go out into the real world and work for a week. They wouldn't last that long !!
SUPPORT OUR TROOPS, BRING THEM HOME, ALIVE AND WHOLE. NOW.
Posted by: Don Fitzgerald, America | February 15, 2009 11:02 AM
Poor babies......I'm sure the republicans may be sympathetic, but I could care less.
Posted by: bill r. | February 15, 2009 11:32 AM
Maybe the wall street managers would like to tie their personal fortunes to the bailout, If they repair their companies and they start paying back the money then they can take bonuses, BUT if the companies can't recover then they have to use their personal funds to cover the losses to the US Taxpayer. Any takers? I bet not!
Posted by: muffler | February 15, 2009 12:44 PM
TS - let the banksters join the common folk. These Wall St geniues have destroyed most everything they touched. From banks, to hedge funds, to CDS, to whatever, these Wall St failures have only been titans of disaster. If they think that there is someone else who would hire their failed rear ends, then maybe it's best that they go.
Posted by: Continuum | February 15, 2009 12:46 PM
One of the things I find so amusing in this whole debate is that the big companies complain that if they can't compensate their top employees 'properly', they won't be able to keep their top talent.
Um.
Wasn't it the 'top talent' that caused all of these problems in the first place? I say if they threaten to leave, good riddance.
Posted by: mhigh | February 15, 2009 12:48 PM
What is the problem here? Should any company receiving government bail out money really be dishing out bonuses in the millions of dollars? NO!
Time for it to be fair and equitable across the board!
Posted by: The Truth | February 15, 2009 2:31 PM
Where are they going to go? To Japan, whose economy crashed by 12% in the fourth quarter? To Europe, where the economy declined by 4? To Dubai, which is turning into a ghost town as we speak? To China, which had more than 100,000 (that's right, one hundred thousand) riots last year, and which is now collapsing?
Please tell me where these oh-so-valuable people are going to go. Could the rest of us pitch in and buy a bunch of one-way tickets? If they can't make ends meet on half a million, then let's find some other people with some common sense to replace them.
Posted by: Magic Dog | February 15, 2009 8:20 PM
Well, they could "retrain for the service industry" (RR) and get jobs at Wall Mart. That way they could learn the fundamentals of survival under American capitalism.
Posted by: C.Morrisā | February 15, 2009 11:08 PM
A pay cap, its a start but not nearly enough. Where are the criminal charges against John Thain, Stan O'Neal? Where are the clawbacks for all the money they looted?
Posted by: tom | February 16, 2009 12:40 AM
I really like what Sarah Anderson says at the end. That's the truth. I don't know why they are all crying about it: if you ask, me $500,000 a year is WAY more than anyone needs to live comfortably. That's enough to pay a lavish lifestyle for 20 families. When it comes down to it, these people are just greedy for their own wallets and want more money so they can continue screwing coke-addicted escorts and take their companies to stripper parties in the Bahamas to have corporate meetings. Anyone not willing to tie their personal accounts to the banks should be fired for obviously having no interest in the economic build-up.
Posted by: Rodney | February 16, 2009 12:56 AM
This bail-out bill should be helping the peaple that were given home loans that they could not afford, by sales agents that were told to approve the loans and the mortgage companys that approved this loans, because the banks, under a law passed by congress in 1999 gave banks & insurance companys carte blanc to make loans with little regard as to whether the customer could afford it. Puting hundreds of mortgages together and selling them to major financial instutions, which did not take the time to review them was a gross mistake, because all they thought of was the bottom line, not wether these were good accounts or sub-prime paper good for the bathroom.
Posted by: Frank | February 16, 2009 1:30 AM
This bail-out bill should be helping the peaple that were given home loans that they could not afford, by sales agents that were told to approve the loans and the mortgage companys that approved this loans, because the banks, under a law passed by congress in 1999 gave banks & insurance companys carte blanc to make loans with little regard as to whether the customer could afford it. Puting hundreds of mortgages together and selling them to major financial instutions, which did not take the time to review them was a gross mistake, because all they thought of was the bottom line, not wether these were good accounts or sub-prime paper good for the bathroom.
Posted by: Frank | February 16, 2009 1:30 AM
The current political fiasco has no options of the current leftist destroy the high-income earners, ... and the rightist super-corporates that consider themselves gods and having the serfs pay all their god-living expenses.
The current stick approach of the left will see this weeks Wall Street tell them what they think (with certain wallet and "hand signals"). This furthers the arguement with further financial implosion and layoffs of those who are those of the left and lower class/unions, demanding change.
While being a conservative Republican (with democratic enlightenment knowledge!) it seems that the more rational solution would be the European model. No corporate gets above 10x the lowest paid employee.
While I am strongly against the European communist/socialist model of any national origin (including British socialist Keynesians or Rhodians (Mr/Mrs Billary!), the only way to gain a higher income is to boost the income of the lowers to get your pay raise! Not layoffs, then claim a company profit, and demand to get a profit bonus!
No selling "debt" as "assets." No more gouging credit interest rates, making up for others with bad/failed credit. No more usurious credit rates.
A complete overhaul of the whole financial system from insurance, banking, savings, credit, investments ... to treasuries needs to be performed ... across the globe.
Posted by: John Lord | February 16, 2009 2:01 AM
What a bunch of cry babies! Is that what CEO's do? I used to admire bankers for their skills in finance and their hard work. Now, I think they are crockers in suits!
Posted by: Judy | February 16, 2009 2:21 AM
When common folk make 500,000 dollars a year come call me. Until then these CEO's should just be happy to have a job. This is why the nation turned its back on the Republican Party and will throughout this political crisis.
Posted by: Rick | February 16, 2009 6:43 AM
What is missing here is recovering years overpay by Wall Street, and let's not forget it isn't just Wall Street firms, but hedge funds, private equity, regional banks, insurance companies, HMOs, etc. that are paying executives ridiculous salaries.
How to recover this funds? Impose 2 new taxes: 1) 75% income tax bracket for $5.0 million and over salaries; and 2) 1 % wealth tax on anyone worth over $10 million (wealth including securities, trusts, private companies, art collections, real estate, etc.)
Not only will this pay for the stimulus bill, but stop the disparity between rich and middle class.
Posted by: Michael Tracy | February 16, 2009 10:09 AM