Soldi pubblici e compensi: il piano Obama

The WSJ reported that, as predicted on this Blog, the Obama Administration would quickly come down with tougher rules on executive compensation in the aftermath of President Obama describing bonuses by companies participating in the bailout as "shameful." The most severe restrictions will apply only to companies receiving "exceptional assistance." As the article reports:

Under the new rules, companies that receive "exceptional assistance" from taxpayers may not pay any top executive more than $500,000 a year, an administration official said. Any additional compensation would have to be in restricted stock that will not vest until taxpayers have been repaid, the official said.

Treasury's description of the restrictions is here. The provision walks a delicate line. On the one hand, the public needs to be appeased by restricting the compensation practices of companies taking public money. On the other hand, harsh limits will discourage financial institutions from participating in TARP and slow down the financial recovery. At least 50 banks have declined to participate and some financial institutions are talking about paying back their TARP funds as quickly as possible in order to get out from underneath the tougher government scrutiny.

In walking this line, Treasury is adopting harsh restrictions but applying them in a sparse manner. The restrictions limit corporate officials (including the CEO) to $500,000 a year, although they permit some extra compensation in the form of restricted stock (apparently without limit). They apply only to companies accepting "exceptional assistance." The term is currently undefined. The WSJ suggests that the term will apply to bailouts of the magnitude of AIG. That one involved somewhere around $85 billion. In other words, the restrictions will only apply to the most massive of the buyouts. When all is said and done, the number of financial institutions subject to the severe restrictions will probably amount to no more than the fingers on a single hand.

Most interestingly, the Administration will also require that companies accepting exceptional assistance institute "say on pay," an advisory vote for shareholders on compensation practices. Similarly, other financial institutions taking bailout funds may avoid the $500,000 cap on executive compensation if they provide the same advisory vote. As Treasury has indicated: "Companies that participate in generally available capital access programs may waive the $500,000 plus restricted stock rule only by disclosure of their compensation and, if requested, a non-binding “say on pay” shareholder resolution."

First, President Obama is on record favoring legislation that would mandate say on pay for all public companies, not just those participating in the bailout. Thus, it is at least possible that this effort represents a retreat. After all, it will apply say on pay to only a limited class of companies and the restrictions will expire once the bailout money is paid back.

Second, though, it will provide many companies with experience with say on pay. In truth, say on pay gives little authority to shareholders but it does require management to make its case for compensation in a very public way. Say on pay may prove less painful to companies and may benefit them by taking away some of the shareholder animosity towards compensation practices. The experience may weaken the issuer opposition to implementation of say on pay in a broader way.

All of these reforms are stop gaps. They do not address the systemic problems that cut across all industries, not just those in the financial markets. The White House and Treasury have announced a Conference on Long-Term Executive Pay Reform that will seek guidance on "model executive pay initiatives in the cause of establishing best practices and guidelines on executive compensation arrangements for financial institutions." In the end, it is this conference that holds out the prospect of something more systematic and more permanent.

The Race to the Bottom