Administration Announces Rules, Pay Czar For TARP Firms; Proposal For All Companies

By Mike Ferullo and Yin Wilczek

The Obama administration on June 10 issued an executive compensation rule for firms that have received assistance under the Troubled Asset Relief Program (TARP) and announced two broader proposals that would give the Securities and Exchange Commission more powers on executive pay at all publicly traded companies.

The TARP rule implements provisions of the 2009 economic stimulus package limiting bonuses and “golden parachute” payments to executives of financial firms and other entities, including carmakers GM and Chrysler, which have received bailout funds.

In tandem with the rule, Treasury announced the appointment of a “special master” for TARP compensation. Kenneth Feinberg, a Washington attorney who formerly served as chief administrator of the Sept. 11 victims compensation fund, will be responsible for reviewing any compensation paid to top executives and the 100 most highly paid employees of some TARP recipients.

The TARP rule limits bonuses paid to a specified number of top executives and highly paid employees to no more than one-third of their total annual compensation, as calculated under securities regulations.

The number of the top employees covered by the limits depends on the amount of TARP assistance their firm has received. For firms receiving more than $500 million in assistance, the five senior executive officers and the 20 most highly compensated employees are covered.

The rule also encourages TARP firms to pay salaries in the form of stocks, which would be held for long periods of time and not converted to cash until TARP funds are repaid.

The announcement of the TARP pay rule comes one day after Treasury announced that 10 large financial institutions have been cleared to begin paying back $68 billion in rescue funds received last fall. The Treasury official said banks will have to comply with the new regulation until they pay back the government in full.

Broad Powers for Feinberg

As special master, Feinberg's authority would apply to those firms that have received “exceptional assistance” from the government. The Treasury list includes seven firms: American International Group Inc., Citigroup Inc., Bank of America, General Motors, GMAC LLC, Chrysler, and Chrysler Financial.
Treasury said the special master will automatically approve total pay packages valued at less than $500,000.

New Pay Proposals for All Companies

In earlier developments June 9, Treasury and the Securities and Exchange Commission issued a two-pronged proposal on executive pay policies at all publicly traded companies, not only TARP recipients.

Treasury Secretary Timothy Geithner joined SEC Chairman Mary Schapiro and Federal Reserve Governor Dan Tarullo in announcing a new push for so-called “say-on-pay” legislation that would give SEC the authority to require nonbinding shareholder votes on executive pay packages.

The administration also wants Congress to pass legislation that would give the SEC new powers to ensure that corporate compensation committees are more independent, similar to requirements for audit committees under the Sarbanes-Oxley Act. The legislation would direct SEC to issue rules giving pay committees their own authority and funds to hire independent compensation consultants and outside legal counsel.

Say-on-Pay Efforts

The 2009 stimulus law already requires TARP recipients to include a nonbinding shareholder vote on executive compensation in their proxy statements. Schapiro said an administration proposal for all companies is still being drafted.
“At the SEC, our role has not been to set pay scales or cap compensation. Our role is really to protect investors by ensuring that they have all the information that they need to make sound investment decisions, whether those decisions involve casting votes or making decisions to buy or sell stock,” she said.

“We'll be looking at a number of things over the course of the next couple of months,” Schapiro added.

At a news conference June 10, Geithner blamed excessive executive pay practices as a contributing factor to the current financial crisis, in particular among the major investment banks. “Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage,” he said.

Not Effort to ‘Cap Pay.'

At the same time, Geithner stressed that the proposed SEC measures were not aimed at “capping pay” in the financial sector and elsewhere.

Geithner also praised an initiative the Federal Reserve and other bank regulators have undertaken to lay out broad guidance for how bank supervisors should examine compensation practices, to ensure that pay policies reinforce rather than undermine risk management.

“That's critically important, given the role the financial sector plays in the economy, and the particular challenges we all face in trying to bring better risk-management practices and more conservative constraints on risk taking to the financial sector,” he said.

Chairmen of the Senate Banking Committee and House Financial Services Committee June 10 commended the Obama administration on its proposals to curb executive compensation, which, among other measures, would give authority to the Securities and Exchange Commission to mandate say-on-pay.
However, Financial Services Chairman Rep. Barney Frank (D-Mass.) said Congress should go beyond the measures proposed by Geithner. Legislation should be adopted to require the SEC to set principles to prevent corporate boards from providing pay that would lead to excessive risk taking, he said.

For his part, Senate Banking Chairman Christopher Dodd (D-Conn.) said he has long supported “strengthening shareholder voices through ‘say-on-pay’ requirements” and increasing the standards for those charged with the oversight of executive compensation packages. “I will consider it as an integral part of our ongoing efforts to bring financial regulations up to 21st century standards,” he said.

Industry Reaction

The business community, meanwhile, warned that the administration's executive compensation proposals would hurt industry.

Tom Quaadman, executive director of financial reporting and investor opportunity at the U.S. Chamber of Commerce, told BNA June 10 that Treasury was “opening Pandora's Box.” “There is a potential for many unintended consequences that will harm businesses as well as the American economy,” he said.

Quaadman noted that Geithner's proposals would significantly expand the scope of Treasury's compensation rules by extending them to all publicly traded companies. “We have a problem with taking the problems of the financial sector and bootstrapping them to the rest of the U.S. economy,” he said.

Investor Reaction

On the other side, the institutional investor community lauded Geithner and Schapiro's announcements. Amy Borrus, deputy director for the Council of Institutional Investors—a longtime supporter of say on pay—told BNA June 10 that it was appropriate for Treasury to tackle executive compensation, given that “poorly structured executive compensation plans that encouraged excessive risk taking were a contributing factor in the financial crisis.”