Bailout Comp Restrictions May Curtail Rewards for Risk

Restrictions on executive compensation contained in the massive financial markets rescue package reflect congressional—and constituent—anger about exorbitant payouts to Wall Street executives who were at the controls when their firms sank.

Congress was right on the money when it reined in C-suite pay for firms participating in the $700 billion federal bailout, according to Nell Minow, editor of the Corporate Library, a governance think tank in Maine. President Bush signed the bailout plan into law October 3.

Financial firms collapsed under the weight of complex mortgage-based assets whose value is plummeting as the housing market deteriorates. Executives were inspired to concoct the opaque mortgage derivatives, or at least foster their creation, because of enormous financial incentives to take big gambles, Minow said.

“The pay plans poured gasoline on the fire and were a direct contributor to the demise of these financial institutions,” she said.

The degree to which executive compensation is limited for firms selling toxic assets to the government depends on whether the Treasury Department buys them directly or at an auction.

In general, the rules curb golden parachutes; enable companies to recover bonuses paid for inaccurate performance achievements; and “exclude incentives for executive officers … to take unnecessary and excessive risks.”

Although these reforms apply to relatively few companies, Democratic congressional leaders want to address executive pay next year. 

“There now exists a template that Congress could follow if it wanted to extend prohibitions on compensation to the rest of corporate America,” said Steven Seelig, executive compensation counsel at Watson Wyatt Worldwide in Arlington, Virginia.

With CEO pay skyrocketing while income for average workers stagnates, the issue has become volatile.

“Incentives are the life blood of any economy, and they are at risk in this backlash,” said Leslie Stretch, CEO of Callidus Software, a San Jose, California, maker of pay management programs.

The desire to start curbing compensation at the top of the corporate ladder is misguided, Stretch said. With 30 million to 40 million workers receiving variable pay, companies should take a harder look at the returns they’re receiving on rewards for the rank and file.

Stretch suggests requiring a line on financial disclosure forms that outlines incentives that are awarded across the company.

“The world at large has not addressed this problem in a structured way,” Stretch said.

Other experts don’t predict fundamental changes in pay systems.

“I don’t see the desire to reduce the rewarding for risk,” said John Mancuso, managing director of executive compensation and benefits at the Bostonian Group, a Boston consulting firm. “I see a more well-rounded package on the executive benefits side versus pure equity.”

Mancuso predicts greater use of restricted stock and more emphasis on performance rather than length of tenure when vesting bonuses.

Taking prudent risks that result in accomplishing business goals—like developing innovative products—should continue to be rewarded, said Charles Tharp, executive vice president for policy at the Center on Executive Compensation, a Washington organization sponsored by the HR Policy Association.

“Most companies tend to have a greater [emphasis] on long-term incentives, not annual bonuses, which tend not to encourage significant annual risk taking,” Tharp said.

—Mark Schoeff Jr.