Another Sneaky Provision in Stimulus

The NYT is reporting that buried deep in the cavernous bill that is the economic relief bill is a provision restricting CEO compensation for the companies who take tarp money. For those who wanted restrictions on CEO compensation and thought that Sec. Geithner was too conciliatory this was a big victory.

Perhaps because he may be facing a reelection challenge, Sen. Dodd (d) Connecticut inserted the provision.

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.
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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.

As usual there are defenders of the compensation who are aghast at this provision.

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.”

Let's examine these claims. First the paying back of tarp money. If a company can pay back tarp money and remain solvent that sounds fine.= to me. The entire point is to have the money repaid. If you dont need it give it back. Are we supposed to assume that companies who actually need the money will give it back? What sense does that make? the company goes under without the money then the ceo is out of a job and is single handily responsible for sinking the company because he didnt want to limit his own pay. That person should never be in charge of another company and should be out of a job.

Second the idea that they will get another job. Fine. These banks need money because they are insolvent and not able to exist without it. That means these executives are failures. they are bad at their jobs and should look for new ones. I am very doubtful you cant find someone to take the job for the big salary offered. Its not like the smartest and best people are working at the failed banks. So who cares if they get another job unless Mr. Reda means we dont want them to sink another company.

The third claim is one made at several points in the article, that banks will just pay their executives more because there is no hard cap. I think dodd is just daring the heads of these companies to increase the actual salary to the equivalent of the current compensation. The optics for that are terrible and any ceo who tried is likely to be flayed alive by shareholders. In addition there are likely to be tax issues with doing that. The current system exists for a reason and Dodd's provision looks like it does a decent job of cutting down on the compensation.

Several of the restriction opponents discuss the lack of "pay for performance" this provision would create. This of course overlooks the fact that these people receive the money whether they suck or not. Strictly speaking there is pay for performance but it just cant exceed a third of the salary.

The opponents seem to suggest that what this restriction does is create a farm team where people could go and after proving themselves get called up to the majors where they can make the big bucks. Again, all of this must be considered in the light that this applies only to companies who take tarp money. If they repay the money, no more restrictions. So turn the company around and it all goes away.

So a this point im wiling to give dodd some props.