A provision buried deep inside the $787 billion economic stimulus bill would impose restrictions on executive bonuses at financial institutions that are much tougher than those proposed 10 days ago by the Treasury Department.
The provision, inserted by Senate Democrats over the objections of the Obama administration, is aimed at companies that have received financial bailout funds. It would prohibit cash bonuses and almost all other incentive compensation for the five most senior officers and the 20 highest-paid executives at large companies that receive money under the Treasury’s Troubled Asset Relief Program, or TARP.
The stimulus package was approved by the House on Friday, then by the Senate in the late evening.
The pay restrictions resemble those that the Treasury Department announced this month, but are likely to ensnare more executives at many more companies and also to cut more deeply into the bonuses that often account for the bulk of annual pay.
The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.
The provision, written by Senator Christopher J. Dodd, Democrat of Connecticut, highlighted the growing wrath among lawmakers and voters over the lavish compensation that top Wall Street firms and big banks awarded to senior executives at the same time that many of the companies, teetering on the brink of insolvency, received taxpayer-paid bailouts.
“The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence,” Mr. Dodd said Friday. “These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.”
Top economic advisers to President Obama adamantly opposed the pay restrictions, according to Congressional officials, warning lawmakers behind closed doors that they went too far and would cause a brain drain in the financial industry during an acute crisis. Another worry is the tougher restrictions may encourage executives to more quickly pay back the government’s investments since, in a compromise with the financial industry, banks no longer have to replace federal funds with private capital. That could remove an extra capital cushion, further reducing lending.
The legislatively imposed pay curbs are, in essence, a bad report card for the Treasury secretary, Timothy F. Geithner, for failing to be tough enough on companies getting bailout money. His long-awaited bank rescue plan also received harsh reviews when it was released this week.
But some experts on executive compensation warned that the restrictions could unleash unintended consequences, like encouraging banks to increase salaries to make up for diminished incentive pay. Even then, they warned, banks were likely to lose top talent.
“These rules will not work,” James F. Reda, an independent compensation consultant, said on Friday. “Any smart executive will (a) pay back TARP money ASAP or (b) get another job.”
The biggest difference between Mr. Dodd’s provision and the Treasury rules is that the new stimulus provision would apply to any company that either has received money or will receive money in the future under the Treasury’s financial rescue program. By contrast, the plan announced by Mr. Geithner would apply only to companies that receive federal money in the future.
The revised rules do not impose a formal cap on executive compensation, unlike the Treasury proposal. Under that plan, banks were barred from paying more than $500,000 in salary until they repaid the TARP funds to the government. (Banks were permitted to offer bonuses in restricted stock.) Senator Dodd’s rules, however, go a step further, prohibiting banks from awarding restricted stock to 25 top executives equal to more than one-third of their annual cash compensation until the banks have repaid all the money owed.
In addition, the Congressional rules would affect not just a bank’s top management, but also star traders, investment bankers, fund managers and commission-based sales representatives. They have traditionally received multimillion-dollar payouts based on their year-end results.
Jennifer R. Psaki, a spokeswoman for the White House, said President Obama “shares a deep concern about excessive executive compensation at financial firms that are receiving extraordinary assistance from American taxpayers.”
But she hinted at the White House’s displeasure, saying that Mr. Obama “looks forward to working with Congress to responsibly address this issue.”
One unintended effect, compensation experts said, is that financial firms might increase banker salaries in order to increase the restricted stock awards. “About the only way to address these limits is to pay large salaries,” said Michael S. Melbinger, an executive compensation lawyer at Winston & Strawn in Chicago. “There’s no pay for performance in this.”
Others warned that because of the rules, firms might lose their best traders and managers to hedge funds and foreign banks.
Alan Johnson, a compensation consultant who advises many Wall Street banks, said that the rules would make it hard to recruit new managers, too.
“At some point, you begin to wonder: has the government given up on these companies anyway?” he said. “Why would the government or White House want to go along with that unless they have come to the conclusion they will have to nationalize these firms anyway?”
Edmund L. Andrews reported from Washington, and Eric Dash from New York