Strong Senate approval on Wednesday night, October 1, gave new momentum to a $700 billion rescue of financial markets that includes curbs on executive pay at financial firms that participate in the program.
The package is largely the same as the one that failed in the House earlier in the week. But the Senate added several tax measures, a higher limit on deposit insurance and legislation that would require cost, and coverage parity between mental health and medical benefits in insurance plans that offer both.
The underlying bill authorizes the federal purchase of troubled mortgage-based assets from banks and other financial institutions to avert a systemic Wall Street failure. Proponents of the legislation, including business groups that are fiercely lobbying Capitol Hill, warn that a credit freeze already is limiting loans for consumers, students and businesses.
After nearly two weeks of bipartisan talks and two major setbacks, senators hailed their chamber’s 74-25 vote as a breakthrough. Both presidential candidates—Sens. John McCain, R-Arizona, and Barack Obama, D-Illinois—supported the bill.
“This vote tonight is the turning point,” said Sen. Max Baucus, D-Montana and chairman of the Senate Finance Committee, on Monday at a press conference after the vote.
Now the bill returns to an uncertain fate in the House, where it fell 228-205 on Monday, September 29. A vote on the Senate-approved version could come Friday.
“Inaction is not an option,” said Senate Majority Leader Harry Reid, D-Nevada. “It’s my expectation that the House of Representatives will follow suit.”
Even if the House tweaks the bill further, it is unlikely to change the carefully negotiated executive compensation provisions.
Under the bill, a company that sells assets directly to the government would be barred from giving golden parachute severance packages to departing executives and would be compelled to “exclude incentives for executive officers … to take unnecessary and excessive risks.” It also would have to recover bonus or incentive compensation paid to a senior executive based on performance measures that later proved inaccurate.
If a firm sells more than $300 million in assets to the government at an auction, it would be prohibited from offering golden parachutes to newly hired senior executives. The company would be subject to a 20 percent excise tax on golden parachute payments to fired executives. Tax deductions would be limited for compensation above $500,000.
Initially, the Bush administration resisted the executive compensation provisions. But the business community is now onboard in a move that has helped build bipartisan support for the bill.
“It’s not unreasonable for the government to have control and oversight on compensation for companies that sell assets to the government,” said Tom Lehner, policy director at the Business Roundtable, a Washington group representing CEOs of big companies.
It won’t be clear how many of the executive compensation restrictions will work until the Treasury Department writes corresponding regulations.
Charles Tharp, executive vice president for policy at the Center on Executive Compensation in Washington, is concerned that amorphous definitions could hamper corporations.
“I don’t know how you comply with vague statements like ‘inappropriate’ or ‘excessive risk,’ ” Tharp said. “I don’t know what excessive risk is. It really ties the hands of the board.”
He also warned that “there needs to be more thought on how to implement” the golden parachute limits. Those rules could prevent weak firms from finding new leaders.
“Not being able to offer severance will make it harder to recruit and retain people,” Tharp said. “Severance gives someone an incentive to join a troubled company and turn it around.”
Sen. Christopher Dodd, D-Connecticut and chairman of the Senate Banking Committee, downplayed such worries about the bill. He pointed out that the executive compensation rules are calibrated based on how companies participate in the rescue.
“I don’t think this is any great restraint,” Dodd said in an interview after the Senate vote. “Besides, these firms won’t be doing much hiring given the shape they’re in.”
Even though it’s not yet law, the financial rescue measure may add more urgency to pay considerations in corporate America.
“Compensation committees already have started to focus on reducing severance multiples and change in control payments over the past year,” said Steven Seelig, executive compensation counsel at Watson Wyatt in Arlington, Virginia.
–Mark Schoeff Jr.
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