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Failed Bailout Demonstrates Support for Executive Compensation Reform

September 29, 2008
Congressional frustration with soaring Wall Street pay surfaced in a massive legislative package that narrowly failed in the House, 228-206, on Monday, September 29.

The 110-page bill would have authorized $700 billion for federal purchase of toxic mortgage-based securities that threaten the survival of financial firms. In an effort to build political support for its passage, several executive compensation provisions were included.

But even as proponents of the legislation warned that a failure on Wall Street could quickly dry up credit for auto, student and business loans across the country, they couldn’t assuage skeptics concerned about the biggest federal intervention in the markets since the Great Depression.

Congressional leaders worked all weekend to cobble together a bipartisan compromise following a blowup between the principal negotiators at a White House meeting on September 25. With partisan recriminations flying after the House vote setback, it’s not clear what the next step will be.

Any legislation that emerges in the future likely will contain executive compensation reform because of its bipartisan popularity.

Under the failed bill, a firm would be prohibited from offering multimillion-dollar golden-parachute severance packages to newly hired executives in its top five positions if it sold more than $300 million in securities to the government in a public auction. The company would not be allowed tax deductions for executive compensation over $500,000 and would be penalized for giving golden parachutes to fired executives.

A company that sells securities directly to the government would be barred from using golden parachutes and would be compelled to “exclude incentives for executive officers … to take unnecessary and excessive risks.” It also would have to recover bonuses or incentive compensation paid to a senior executive based on performance measures that later proved inaccurate.

One pay policy that did not make it into the final bill was a mandatory shareholder vote on executive compensation. Executive pay experts were relieved that the regulations contained in the bill did not go further.

But Don Lindner, executive compensation practice leader at WorldatWork, said that the bill would have handcuffed hiring at faltering companies by limiting pay latitude.

“They’re not going to get the best talent. They’re going to get the talent that’s willing to take the job under those conditions,” Lindner said.

As Congress continues to address the financial crisis, it should hew to the executive pay formula that it put in the failed bill, according to Mark Poerio, co-chair of the global executive compensation and employee benefits group at the law firm Paul Hastings.

“They’ve whittled them down to items that make sense,” Poerio said, citing the so-called clawback provision and limits rewarding risky behavior.

Before returning to executive pay reform, Lindner urges Congress to take a step back. Recent Securities and Exchange Commission regulations require more comprehensive and transparent disclosure about executive compensation.

“We’re not giving them a chance to work,” Lindner said.

The congressional appetite for a crackdown on exorbitant Wall Street pay was apparent at a Capitol Hill news conference on Sunday, September 28, celebrating the bailout agreement.

“The party is over,” House Speaker Nancy Pelosi, D-California, said. “The era of golden parachutes for highflying Wall Street operators is over.”

Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, hailed the curbs on C-suite remuneration.

“This will be the first time anything has been done by Congress to curtail excessive CEO compensation,” Frank said.

Poerio warned, however, that going too far with pay parameters would make the U.S. a less attractive market for high-powered executives.

“It plays on Main Street, but it still has to make sense in a global market,” Poerio said. “It’s not to say we don’t need regulations. We need to be judicious about them.”

—Mark Schoeff Jr.

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