Globalise Not!

Obama imposes salary cap for firms that join bailout

If business that make billion dollar deals can fail, why are they able to cough up high salaries? Who is reponsible for the rich / poor divide?


President Barack Obama on Wednesday imposed a salary cap of $500,000 for top executives at companies that receive large amounts of bailout money, saying that some executives were being "rewarded for failure," in part with taxpayer-subsidized money.

"We all need to take responsibility," the president said as he prompted Congress once again to act on his economic stimulus program and repeated his comments that some Wall Street executives had shown "the height of irresponsibility."

He urged the Senate to pass his economic stimulus package, now calculated to exceed $900 billion, perhaps even $1 trillion, saying: "A failure to act, and act now, will turn crisis into a catastrophe. Millions more jobs will be lost."

A handful of companies will probably be most directly affected by the salary cap - Citigroup, Bank of America, American International Group, General Motors and Chrysler - though others will also face tighter restrictions. All the companies are expected to look for ways to remain competitive in the fierce bidding for the most talented executives.

The move, which Obama described as "basic common sense," reflects rising public and congressional resentment at the notion of money-losing companies drawing federal aid while paying multimillion-dollar bonuses to top executives.

"We don't begrudge anybody for achieving success, and we believe that success should be rewarded," he said. "But what gets people upset - and rightfully so - are executives being rewarded for failure, especially when those rewards are subsidized by U.S. taxpayers."

Treasury Secretary Timothy Geithner, appearing with the president for the White House announcement, said that many less wealthy Americans felt that they were bearing a heavier burden from the financial crisis than were those who helped create it.

The Bush administration had imposed general restrictions on executive pay, but the new rules are far tougher and could force executives to accept deep pay reductions. The impact probably would be felt most acutely in financial centers like New York.

Executives at companies that have already received money from the Treasury Department would not have to make any changes. But analysts and administration officials expect a huge wave of new losses, largely because of the deepening recession, and say that many companies that have already received federal money may come back.

Other countries have also considered pay limits, though not as strict. European Union finance ministers declared that managers of bailed-out European banks should "not retain undue benefit," but they left it to member states to define specific limits. Germany plans to ban bonuses and set a ?500,000, or $640,000, pay limit for executives at rescued banks, Reuters reported.

Obama's announcement on pay seemed to have a clear political component: He was trying to regain the initiative after a day in which two important political appointees, Tom Daschle and Nancy Killefer, withdrew from consideration over tax problems. Obama subsequently conceded having "screwed up" by pushing Daschle's appointment to head the Health and Human Services Department.

In a comment regarding Daschle that might almost have applied to executive pay, Obama told NBC on Tuesday: "Ultimately, it's important for this administration to send a message that there aren't two sets of rules. You know, one for prominent people and one for ordinary folks."

Obama said Wednesday that Geithner would introduce a major new plan next week to further shore up banks - and reportedly also help homeowners and home buyers. Laying the groundwork for that, the tough language on executive pay now might help defuse the angry opposition he surely will face over another big spending plan.

"We will have to do more, substantially more, to fix this crisis," Geithner said.

The new rules would have these effects on the companies receiving the largest amounts of bailout money:

Senior executives would be limited to $500,000 in total annual compensation, other than restricted stock. They would be able to cash in such stock only after the government had been repaid.

Executive compensation terms must be fully disclosed and subject to a so-called "say on pay" provision - largely a question of accountability, meaning that they must be submitted to a nonbinding vote by shareholders.

Previously, the top five executives in a given company had to have "claw-back" provisions meaning they could pull back bonuses or incentive pay from anyone found to have knowingly provided inaccurate financial information used to calculate incentives; now that will extend to the next 20 executives as well.

Before, the top five executives at each company were barred from receiving "golden parachute" payments upon severance. Now that will extend to the top 10, and the next 25 will be barred from severance payments exceeding a year's compensation.

For companies receiving smaller bailouts, the $500,000 compensation limit applies, but it can be waived if they fully disclose compensation terms and adopt a "say on pay" approach. The claw-back provisions apply. And the top five executives will be allowed a maximum one-year compensation upon severance, not the current three.

Last May, the insurer Aflac became the first American company to adopt a say-on-pay approach. Other U.S. companies are following suit.

Say-on-pay votes have long been common in Britain and Australia, and experts believe they have helped slow the rise of compensation.

Under the U.S. Treasury's $700 billion rescue program, most companies that have received money so far have been classified "healthy" rather than on the brink of collapse.

But those receiving "exceptional assistance," like Citigroup and the others, faced acute problems. And top executives at those companies made far more than $500,000 in recent years.

Kenneth Lewis, chief executive of Bank of America, took home more than $20 million in 2007, including $5.75 million in salary and bonuses.

Vikram Pandit, who became chief executive of Citigroup in December 2007, made $3.1 million.

Richard Wagoner, chief executive of General Motors, made $14.4 million, most of it in stock, options and other noncash benefits.

Public and congressional pressure has grown so sharp that Wagoner, and also Robert Nardelli, chief executive of Chrysler, recently said they would reduce their personal compensation to a dollar a year.

Robert Frank, a Cornell University economist, wrote recently in The New York Times that "executive pay in the United States is vastly higher than necessary," and the public condemnation entirely understandable.

"Executives in other countries, whose pay is often less than one-fifth that of their American counterparts, seem to work just as hard and perform just as well," he wrote.

Frank argued against a pay cap, however, saying that "in large companies, even small differences in managerial talent can make an enormous difference."

James Reda, managing director of James F. Reda & Associates, a compensation consulting firm, said that such limits would make it hard for big companies to recruit and keep executives.

"I don't think this will work," he said, adding that for top executives, the new cuts would be "pretty draconian."

But others say that excessively high executive pay has tended to foster a dangerous culture of excessive risk, much as flourished before the Great Depression.

"Wages in finance were excessively high around 1930 and from the mid-1990s until 2006," according to a National Bureau of Economic Research paper by Thomas Philippon and Ariell Reshef.

Labels: Bailout, IHT, Obama, Wage Cap

posted by they lied @ 10:59 PM Comments: 0