Congress Wants Details On Bailout Firms' Bonus Plans
By: Wall Street firms may already be aware of that public relations nightmare and readying gestures to quiet the storm. It's also too soon to tell how much bonus money is at stake. Few firms have commented on the issue publicly. One of the better-off firms, JPMorgan Chase ,which is also participating in the bailout plan, recently said it was cutting bonuses, but did not say it was eliminating them altogether.
Some critics of Secretary Paulson have accused him of being too too close to Wall Street, even as he has been thrust into the dual roles of fireman and policeman during a one-of-a-kind financial crisis. (Treasury has not responded to a request for comment around the time of publication)
What's more, the limited restrictions on CEO compensation in the bailout legislation, known as the Emergency Economic Stabilization Act, or EESA, were included at the urging of Congress. Like much else in the law, the restrictions give broad discretionary power to the Treasury Secretary.
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The EESA's restrictions on executive pay vary from program to program, but they universally limit tax deductions on pay up to $500,000. For the capital purchase program, which is now being used to recapitalize banks, the measures also eliminated the existing exception for performance-based compensation, such as bonuses.
The recap program also directs the Treasury secretary to prevent "incentives" that encourage executives "to take unnecessary and excessive risks that threaten the value of the financial institution," and bans so-called "golden parachutes" to the top five senior executives, whose compensation must be reported under existing SEC regulations.
Compensation experts say the restrictions won't make much of a difference.
Even supporters of the bailout plan and the pay measures admit they could have been stronger.
"We tried to get more restrictive language in the bill," says Steve Adamske, a spokesman for House Financial Services Committee Chairman Barney Frank (D. Mass.) "We were not able to go as far as we would have perhaps wanted," he says, noting that the House earlier this year passed an advisory vote on a non-binding resolution giving shareholders a greater say on pay.
Corporate Culture Clash
What happens from here may partly depend on what happens behind closed doors. Experts say it is possible executives could be persuaded or pressured into taking smaller bonuses or forgoing them altogether — by the government or their boards.
There was a hint of that from the federal government recently when the SEC's Division of Corporation Finance Director John White addressed stock plan professionals at the 3rd Annual Proxy Disclosure Conference in New Orleans.
He spoke at length about the changes mandated by the EESA and, as one observer put it, "told boards to do what they thought Congress wanted them to do."
Some observers say none other than Henry Paulson might be doing some of the persuading.
Wall Street firms may already be aware of that public relations nightmare and readying gestures to quiet the storm. It's also too soon to tell how much bonus money is at stake. Few firms have commented on the issue publicly. One of the better-off firms, JPMorgan Chase ,which is also participating in the bailout plan, recently said it was cutting bonuses, but did not say it was eliminating them altogether.
Some critics of Secretary Paulson have accused him of being too too close to Wall Street, even as he has been thrust into the dual roles of fireman and policeman during a one-of-a-kind financial crisis. (Treasury has not responded to a request for comment around the time of publication)
What's more, the limited restrictions on CEO compensation in the bailout legislation, known as the Emergency Economic Stabilization Act, or EESA, were included at the urging of Congress. Like much else in the law, the restrictions give broad discretionary power to the Treasury Secretary.
More from CNBC:
- Treasury May Expand Rescue Plan to Include Private Banks
The EESA's restrictions on executive pay vary from program to program, but they universally limit tax deductions on pay up to $500,000. For the capital purchase program, which is now being used to recapitalize banks, the measures also eliminated the existing exception for performance-based compensation, such as bonuses.
The recap program also directs the Treasury secretary to prevent "incentives" that encourage executives "to take unnecessary and excessive risks that threaten the value of the financial institution," and bans so-called "golden parachutes" to the top five senior executives, whose compensation must be reported under existing SEC regulations.
Compensation experts say the restrictions won't make much of a difference.
"I hope so," says Keith Johnson, who heads the institutional investor services practice group at Reinhart Boerner Van Deuren. "Giving back their unearned compensation, any jesture would be a recognition of the roles they have played in helping create the situation we're suffering in. It would also help inevstors regain faith in the system."
Though many observes say the Treasury secretary should be doing that, skeptics find it hard to believe.
"How in the hell is he going to tell others that they should take less when he took half a billion dollars [in his career]?" says Rep. Sherman. "The most likely outcome is that the executives will get to keep the money."
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Wall Street firms may already be aware of that public relations nightmare and readying gestures to quiet the storm. It's also too soon to tell how much bonus money is at stake. Few firms have commented on the issue publicly. One of the better-off firms, JPMorgan Chase ,which is also participating in the bailout plan, recently said it was cutting bonuses, but did not say it was eliminating them altogether.
Some critics of Secretary Paulson have accused him of being too too close to Wall Street, even as he has been thrust into the dual roles of fireman and policeman during a one-of-a-kind financial crisis. (Treasury has not responded to a request for comment around the time of publication)
What's more, the limited restrictions on CEO compensation in the bailout legislation, known as the Emergency Economic Stabilization Act, or EESA, were included at the urging of Congress. Like much else in the law, the restrictions give broad discretionary power to the Treasury Secretary.
More from CNBC:
- Treasury May Expand Rescue Plan to Include Private Banks
The EESA's restrictions on executive pay vary from program to program, but they universally limit tax deductions on pay up to $500,000. For the capital purchase program, which is now being used to recapitalize banks, the measures also eliminated the existing exception for performance-based compensation, such as bonuses.
The recap program also directs the Treasury secretary to prevent "incentives" that encourage executives "to take unnecessary and excessive risks that threaten the value of the financial institution," and bans so-called "golden parachutes" to the top five senior executives, whose compensation must be reported under existing SEC regulations.
Compensation experts say the restrictions won't make much of a difference.
"I think it would be reckless not to assume that there probably is somone working for him [Paulson] making a damage control calculation," says Dezenhall, the damage control expert. "You're dealing with a virtually guaranteed backlash."
Kesner of Deloitte says corporate America has read the writing on the wall, adding that he has a number of corporate clients whose stock is down sharply, are laying off employees, and feeling a lot of pressure to make a gesture, whether it's a salary freeze or giving up part of their bonuses.
"My client base doesn't really want to be seen as the bad guy," he says. "I think senior management is going to take steps to avoid it seeming they're making money off the back of their shareholders and taxpayers."
DeFazio is skeptical and prepared to legislate.
"If not, they'll be making my day. I've been trying to close these loopholes for years," he says of the compensation rules. "They'll become juicy targets."
The absence of any such gestures, however, is also likely to generate enough public outrage and thus draw more scrutiny, increasing the chance of civil and/or criminal investigations, sources say.
Sherman, for one, doesn't think they'll be much of that given what he sees as a general lack of wrongdoing in the crisis, but he did warn those who crossed the line.
"If any executive did anything wrong, he better have done it in 1997 and not 2007," he says. "If it was at a financial institution, there is going to more scrutiny. If there is anything illegal it's going to to be dealt with far more harshly."
(Editor's note: This story has been updated and republished since its original publish date of Oct. 28.)
