Congressional leaders and the Bush administration are continuing to hammer out a deal on a bill that would provide $700 billion for the purchase of bad assets from financial companies and would also include provisions designed to curb executive pay.
Proponents of the massive rescue point to the link between Wall Street and Main Street. If credit dries up because of the collapse of the former, consumers, small businesses and students around the country will suffer.
But Main Street is pushing back. Members of Congress are getting an earful from constituents who are angry about the exorbitant salaries and golden parachutes of Wall Street titans.
In response, the final package is likely to contain a version of executive pay reforms along the lines of two Democratic proposals.
Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, and Sen. Christopher Dodd, D-Connecticut and chairman of the Senate Banking Committee, both want to limit compensation for executives who take excessive risks, implement “claw-back” procedures for companies to recoup pay based on performance measures that later turn out to be inaccurate, and limit severance payments.
Frank goes further than Dodd, according to Steve Seelig, executive compensation counsel at Watson Wyatt Worldwide in Arlington, Virginia. Frank would put an absolute prohibition on severance payments and require that companies participating in the bailout hold nonbinding shareholder say-on-pay votes regarding C-suite salaries.
It’s not clear how the final bailout legislation will look. As of late afternoon Thursday, September 25, a final agreement had not been announced. Earlier in the week, there was some question about whether companies would participate if doing so restricted their latitude in setting executive pay.
Now the White House and business groups are acknowledging executive compensation will be part of the deal.
“I think we all understand the sentiment that executives should not have a windfall based on something that was a failure,” said White House Press Secretary Dana Perino at a briefing Thursday, September 25.
She spoke in advance of a bipartisan meeting between President Bush, congressional leaders and the presidential nominees—Sens. John McCain, R-Arizona, and Barack Obama, D-Illinois.
The key to addressing executive pay is formulating legislation that punishes culpable executives “yet enables [companies] to attract the best and the brightest to deal with the situation,” said R. Bruce Josten, executive vice president of government affairs for the U.S. Chamber of Commerce.
Seelig cautions that previous attempts by Congress to limit executive pay have led to unintended consequences like a big increase in the use of stock options.
If severance is prohibited, for instance, companies might boost fixed pay and signing bonuses or enrich executive pensions.
“Companies that try to attract talented individuals will have to put money into something else,” Seelig said.
Many Americans are telling Congress they don’t want their tax dollars spent feathering the nests of leaders of failed financial companies.
“It’s probably the No. 1 thing we hear about [in] calls from back home,” said Rep. Brad Ellsworth, D-Indiana. “People in Indiana shouldn’t be held accountable for poor decisions made by Wall Street executives who are making millions of dollars.”
In order to educate voters about the financial bill, Ellsworth emphasizes that its impact goes beyond Wall Street to Main Street.
“It’s not just Congress bailing out four or five companies,” Ellsworth said. “This has implications in all of our homes, no matter what congressional district we’re in.”
That argument will have to prevail if congressional leaders are going to line up enough rank-and-file members like Ellsworth to approve the bill to save the financial markets.