Analysis of Treasury Department Rules on Executive Compensation

For Immediate Release

Contact: 

Sarah Anderson, tel: 202 234 9382 x 227, saraha@igc.org

Institute for Policy Studies (IPS)

Analysis of Treasury Department Rules on Executive Compensation

WASHINGTON - The Treasury
Department today issued
rules
for
executive pay for firms participating in the government's financial
sector
bailout. These rules clarify some provisions of the bailout
legislation, but
reinforce the law's major shortcoming: the failure to set any specific
limit on
the pay of top executives at bailed-out companies.

The bill applies three different sets of executive compensation
criteria,
depending on whether 1) the government provides equity capital to the
institution, 2) provides direct assistance to a failing institution, or
3) purchases
troubled assets through auction. The strictest criteria apply to the
failing
institutions.

SUMMARY
OF EXECUTIVE PAY RULES

Capital Purchase Program
(The
Treasury provides equity capital directly to certain financial
institutions)

Programs For
Systematically Significant Failing Institutions
(Treasury
provides direct assistance to firms negotiated on a case-by-case basis)

Troubled Asset Auction
Program
(Treasury
purchases troubled assets through auction and such purchases exceed
$300 million)

Limits on pay: Treasury will ensure
that "incentive compensation for senior executives does not encourage
unnecessary and excessive risks that threaten the value of the
financial institution."

No limits on pay

Clawback: Bonuses or other awards
based on inaccurate financial reports must be returned.

No criteria on clawbacks.

Severance: Ban on "golden
parachutes" for top five senior executives, based on the Internal
Revenue Code. The IRS defines such payments as those made when an
institution is insolvent, in receivership, in bankruptcy, or in a
"troubled condition."

Severance: Ban on all payments to
departing senior executives (most strict).

Severance: Ban on golden parachutes
for executives hired after the auction. For other executives,
institution may not deduct certain golden parachute payments to its
senior executives and a 20% excise tax will be imposed on the senior
executive for these parachute payments.

Cap on tax deductibility:
Firms
will not be allowed to deduct executive pay that exceeds $500,000 per
year from their corporate income taxes.

DETAILED ANALYSIS

Major shortcoming: No set limits on
compensation


The key
rule on
executive compensation allows the Treasury Secretary to look the other
way if
bailed out firms continue to hand out massive paychecks to executives.
The rule
merely requires that the Treasury ensure that "incentive compensation
for
senior executives does not encourage unnecessary and excessive risks
that threaten
the value of the financial institution." Neither the legislation nor
the
Treasury Department rules define what might constitute an "unnecessary
and
excessive risk."

"There is nothing in the Treasury Department's new rules that would
prevent a
nationalized bank's board of directors from approving a $20 million CEO
pay
package - unless the Treasury Secretary decides that reward poses an
excessive
risk to the institution," says IPS executive compensation expert Sarah
Anderson.
"Without clear limits on pay, the public is being asked to put their
trust in
Secretary Paulson, a man who made hundreds of millions of dollars as a
Wall
Street CEO, to decide what's ‘excessive.'"

The Institute for Policy Studies has calculated that the nine major
banks being
bailed out by Treasury paid their CEOs a combined $289 million in 2007.

Nationalized banks

CEO in 2007

total compensation in 2007

Merrill Lynch,

John Thain

83,092,713

Goldman Sachs

Lloyd Blankfein

53,965,418

Morgan Stanley

John Mack

41,734,815

J.P. Morgan Chase

James Dimon

28,856,330

Bank of New York Mellon

Robert Kelly

20,515,810

State Street

Ronald Logue

19,551,400

Wells Fargo

Richard Kovacevich

18,510,694

Citigroup

Vikram Pandit*

3,160,000

Bank of America

Kenneth Lewis

20,040,000

total

 

289,427,180

*
Pandit was
promoted to CEO in Dec. 2007, 8 months after joining Citigroup.
Source:  Associated Press inter-active online
survey.  Includes stock options grants.

A Bright Spot: Cap on tax deductibility strengthened

The
Treasury
rules expand the $500,000 cap on tax deductibility to all participating
firms. The
bailout legislation just applied that cap to firms that sell assets to
the
government through auction.

The current U.S.
tax code places a $1 million cap on tax deductibility for executive
compensation, but this provision has been meaningless in practice
because it
allows exceptions for "performance-based" pay. Most companies simply
limit top
executive salaries to around $1 million and then add on to that total
various
assortments of "performance-based" bonuses, stock awards, and other
long-term
compensation. The bailout legislation was designed to close this
loophole by
eliminating that exception for executives of bailed-out firms.

Additional Rules

Ban on "golden parachutes": The top five senior executive
officers will face
restrictions on severance payments if they leave the company that's
getting
bailout dollars. The strictest rule will apply to executives of
"failing
institutions," who cannot receive any type of payment upon leaving the
company.
Congress is right to ensure that executives who drove the country into
this
mess should not be allowed to walk away with massive payoffs.

Clawback: Executives of bailed-out firms who receive bonuses or
other
awards that later turn out to be based on "materially inaccurate"
financial
reports will need to give that money back. This rule applies only to
firms that
receive direct government assistance.

BROADER CRITIQUE OF THE BAILOUT BILL

For additional IPS analysis on the broader aspects of the bailout bill,
see: www.ips-dc.org.
These
materials include A
Sensible Plan for Recovery
.

 

###

The Institute for Policy Studies turns Ideas into Action for Peace, Justice and the Environment. We strengthen social movements with independent research, visionary thinking, and links to the grassroots, scholars and elected officials. I.F. Stone once called IPS "the think tank for the rest of us." Since 1963, we have empowered people to build healthy and democratic societies in communities, the US, and the world.

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