“That is the height of irresponsibility,” Mr. Obama said angrily. “It is shameful, and part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.”
But corporations have few legal options for recovering employees’ pay, unless those employees were involved in fraud or other wrongdoing. State wage laws and compensation contracts typically prohibit such moves.
While several companies have recouped bonuses from executives and employees in recent years, those battles have been long and hard. Regulators and shareholders recovered money from William W. McGuire, former chairman and chief executive of the UnitedHealth Group , after he was accused of backdating his stock options. But federal regulators spent years trying to get Franklin D. Raines, former chief executive at Fannie Mae , to return his bonuses after accounting problems surfaced there, and got only part of the money back.
New York State has a so-called fraudulent conveyance law that enables creditors to sue to recover unjustified compensation in certain cases. But to win, plaintiffs must show that the executives did not earn their bonuses and that the companies that made payments were undercapitalized.
The state’s attorney general, Andrew M. Cuomo, threatened to bring such a suit on behalf of New York against the American International Group, the insurance giant, to compel it to recover bonuses that had been paid and to suspend further payments. The company agreed to cooperate with Mr. Cuomo’s office and suspended future bonuses, but it has not yet recovered previous payments.
The law may be much less effective in recouping bonuses paid out by banks like Merrill Lynch and Bank of America because they are not considered undercapitalized.
With A.I.G. , Mr. Cuomo could have made a strong case that the insurer did not have enough capital. That is because the Federal Reserve lent the company $85 billion to keep it afloat. But it would be harder to make that case for the banks, since they received capital from the federal government months earlier.
Other options are also problematic. Mr. Cuomo, other officials and shareholders could try to make the case that banks committed securities fraud in paying the bonuses.
In that case, they would have to prove that executives deceived directors or withheld material information about the health of the company in order to be paid. Mr. Cuomo’s office has subpoenaed Merrill Lynch and is investigating the timing and disclosure of a big fourth-quarter loss and a $4 billion bonus payout.
Recovering money from rank-and-file bankers would be even tougher. After all, there is no law against making bad decisions, even when those decisions lead to crippling losses.
Legal experts say most states, including New York, have wage payment laws that will not allow employers to take away bonuses after they are earned. Bankers have a legal claim to the money.
“If the main purpose of the plan is to retain people for a three-year period, you might have an argument,” Mr. Melbinger said. “If this is an annual bonus and the year is over, then you might have trouble clawing it back.”
Even if Congress rewrote the laws to demand that Wall Street firms cancel their bonuses, Mr. Melbinger said, such action might put the corporations in violation of their legally binding compensation plans.
Some suggest that the easiest way for Congress to recover the money would be to impose a substantial tax on 2008 Wall Street bonuses retroactively, but that would hurt New York and other financial centers.
While bankers earn far more than people in many other fields, pay experts also noted that bonuses account for a large portion of total compensation on Wall Street. Within the industry, many see bonuses as a kind of deferred salary, rather than simply a reward for good performance. And some bank employees may have done their jobs well, even though their employers lost billions.
Despite the current outcry in Washington, some compensation experts said Congress missed a chance to impose strict limits on 2008 bonuses last fall, when the government embarked on its rescue plan.
“The time to say ‘no bonuses’ has come and gone,” said Brian Foley, an executive compensation consultant in White Plains. “The horse is out of the barn and over the horizon.”
