Critics Say Rules Too Vague To Cap CEO Pay
RENEE MONTAGNE, host:
Treasury Secretary Henry Paulson yesterday laid out more details of the government's financial rescue plan. Those details include restrictions on pay packages for executives whose companies take part in the government bailout. NPR's Yuki Noguchi has this report on what is and what isn't affected by those limits.
YUKI NOGUCHI: Lehman Brothers CEO Richard Fuld pulled down about $400 million or so in the last eight years of running his now-bankrupt bank. Citigroup CEO Vikram Pandit has made about half that in total compensation since he took over just last year. Speaking yesterday, Treasury Secretary Henry Paulson tried to assure the public that the buck has stopped here. He said the billions of dollars the government's investing in financial institutions won't line the pockets of such executives.
Secretary HENRY PAULSON (Treasury Department): Institutions that sell shares to the government will accept restrictions on executive compensation, including a claw-back provision and a ban on golden parachutes during the period the Treasury holds equity issued through this program.
NOGUCHI: Clawing back money from executives who misbehave? No golden parachute? Sounds reasonable. But wait, here's Peter Morici, a professor at the University of Maryland.
Dr. PETER MORICI (Professor of International Business, University of Maryland): The executive compensation provisions in the bailout bill are merely a fig leaf, a cover.
NOGUCHI: The law says, among other things, that compensation should meet, quote, appropriate standards. And it specifies there's no dough for top officers who, quote, take unnecessary and excessive risks with a company. But Morici says there are millions in bonuses, stock options, and other forms of compensation to be made in that vague language.
Dr. MORICI: The language of the legislation is such that it can be easily circumvented.
NOGUCHI: Graef Crystal is an expert on executive compensation who writes a blog on the subject. He points out that under the new law, companies will pay taxes on annual compensation that exceeds half a million dollars, instead of the current million-dollar cap. Crystal says that's one of those things that sounds good but actually hurts shareholders, which in this case will include taxpayers.
Mr. GRAEF CRYSTAL (Columnist, Bloomberg.com): In effect, you're savaging the shareholders a second time, first by paying the excessive money and secondly by not being able to deduct it.
NOGUCHI: Even consultants hired by banks say this new law doesn't add much in the way of new restrictions. Jan Koors is managing director of Pearl Meyer's, a compensation-consulting firm.
Ms. JAN KOORS (Managing Director, Pearl Meyer & Partners): Will lowering that million-dollar cap to half a million dollars significantly change compensation? Probably not.
NOGUCHI: And let's say a banking executive were to screw up, or as the new law puts it, take unnecessary and excessive risks.
Ms. KOORS: The act doesn't anywhere define what unnecessary and excessive risk is, nor does it define how that's going to be determined. So at this point, we have no idea what that means.
NOGUCHI: There was an effort early on to impose tough compensation limits on banks receiving bailout funds, but it never made it into the bill that became law. Professor Morici and blogger Graef Crystal say many lawmakers lack the incentive to impose very tough new rules on the banks. After all, both parties depend on contributions from the industry to fund their campaigns. So, in the end, the new law isn't likely to alter the way banks pay their top dogs. Compensation consultant Jan Koors.
Ms. KOORS: They'll be paying their executives what they think they need to get them and keep them.
NOGUCHI: Yuki Noguchi, NPR News.