Two administration officials just finished briefing White House reporters about the details of President Obama’s new plan to restrict Wall Street compensation. (As a condition of the briefing, I cannot tell you the names of the officials who spoke; reporters objected to this condition at the outset to no avail.)
The briefing did shed some light on the scope of Obama’s new policy, which will, among other things, restrict the compensation of some top executives at firms that receive federal bailouts to just $500,000. The fine print is complicated. Executives will be able to get additional stock grants as compensation, though these grants must be structured in a way that the stock is only cashed in after a several year waiting period, an innovation designed to limit the incentive for short-term risk taking. Furthermore, many banks receiving bailout funds will have an option of seeking a waiver to the $500,000 limit, if shareholders agree to the higher compensation in a public vote.
But the biggest question about the new limits is just how broad the policy will be. During the briefing, one reporter asked just how many bailed out financial firm employees would see pay cuts. (As the AP reported last year, a number of top executives got huge paydays in 2007: The CEO of Goldman Sachs, Lloyd Blankfein: $54 million. The CEO of Merrill Lynch, John A. Thain: $83 million. The chairman of Capital One, Richard D. Fairbank: more than $17 million. The average for each of the banks’ top executives: $2.6 million.)
But aside from the big names, there are also lots of lower level employees at a financial giant like Citibank that make more than $500,000 a year. Should they be thinking of selling their yachts and pulling their kids from private schools? The answer is still a bit fuzzy, but probably no. One of the administration officials said the exact scope of the new limitations would be determined on a company-by-company basis for those firms like Citibank, AIG and Bank of America who are receiving so-called “exceptional” assistance. “For the companies that are getting exceptional assistance, we describe ‘senior management,’ and we will leave that open to looking at a particular company in a particular situation,” the official said. For most of the other banks dipping into non-exceptional TARP funds, the new $500,000 limit will only apply to the top five executives.
This means that while a few top bankers will see big pay cuts, the issue of Wall Street bonuses is not likely to go away. The vast bulk of those bonuses historically go to employees who will not be limited by the new $500,000 policy.
The full legal language of the new policy after the jump.
I. COMPLIANCE AND CERTIFICATION:All Companies Receiving Government Assistance Must Ensure Compliance with Executive Compensation Provisions: The chief executive officers of all companies that have to this point received or do receive any form of government assistance must provide certification that the companies have strictly complied with statutory, Treasury, and contractual executive compensation restrictions. Chief executive officers must re-certify compliance with these restrictions on an annual basis. In addition, the compensation committees of all companies receiving government assistance must provide an explanation of how their senior executive compensation arrangements do not encourage excessive and unnecessary risk-taking.
II. ENHANCED CONDITIONS ON EXECUTIVE COMPENSATION GOING FORWARD:
A. Companies Receiving Exceptional Financial Recovery Assistance:
· Limit Senior Executives to $500,000 in Total Annual Compensation – Other than Restricted Stock: Current programs providing exceptional assistance to financial institutions forbid recipients of government funds from taking a tax deduction for senior executive compensation above $500,000. Today’s guidance takes this restriction further by limiting the total amount of compensation to no more than $500,000 for these senior executives except for restricted stock awards.
· Any Additional Pay for Senior Executives Must Be in Restricted Stock that Vests When the Government Has Been Repaid with Interest: Any pay to a senior executive of a company receiving exceptional assistance beyond $500,000 must be made in restricted stock or other similar long-term incentive arrangements. The senior executive receiving such restricted stock will only be able to cash in either after the government has been repaid – including the contractual dividend payments that ensure taxpayers are compensated for the time value of their money – or after a specified period according to conditions that consider among other factors the degree a company has satisfied repayment obligations, protected taxpayer interests or met lending and stability standards. Such a restricted stock strategy will help assure that senior executives of companies receiving exceptional assistance have incentives aligned with both the long-term interests of shareholders as well as minimizing the costs to taxpayers.
· Executive Compensation Structure and Strategy Must be Fully Disclosed and Subject to a “Say on Pay” Shareholder Resolution: The senior executive compensation structure and the rationale for how compensation is tied to sound risk management must be submitted to a non-binding shareholder resolution. There are no “Say on Pay” provisions in the existing programs.
· Require Provisions to Clawback Bonuses for Top Executives Engaging in Deceptive Practices: Under the existing programs providing exceptional assistance, only the top five senior executives were subject to a clawback provision. Going forward, a company receiving exceptional assistance must have in place provisions to claw back bonuses and incentive compensation from any of the next twenty senior executives if they are found to have knowingly engaged in providing inaccurate information relating to financial statements or performance metrics used to calculate their own incentive pay.
· Increase Ban on Golden Parachutes for Senior Executives: The existing programs providing exceptional assistance to financial institutions prohibited the top five senior executives from receiving any golden parachute payment upon severance from employment, a ban that will be expanded to include the top ten senior executives. In addition, and at a minimum, the next twenty-five executives will be prohibited from receiving any golden parachute payment greater than one year’s compensation upon severance from employment.
· Require Board of Directors’ Adoption of Company Policy Relating to Approval of Luxury Expenditures: The boards of directors of companies receiving exceptional assistance from the government must adopt a company-wide policy on any expenditures related to aviation services, office and facility renovations, entertainment and holiday parties, and conferences and events. This policy is not intended to cover reasonable expenditures for sales conferences, staff development, reasonable performance incentives and other measures tied to a company’s normal business operations. These new rules go beyond current guidelines, and would require certification by chief executive officers for expenditures that could be viewed as excessive or luxury items. Companies should also now post the text of the expenditures policy on their web sites.
B. Financial Institutions Participating in Generally Available Capital Access Programs:
The Treasury intends to issue proposed guidance subject to public comment on the following executive compensation requirements relating to future generally available capital access programs.
· Limit Senior Executives to $500,000 in Total Annual Compensation Plus Restricted Stock – Unless Waived with Full Public Disclosure and Shareholder Vote: Companies that participate in generally available capital access programs may waive the $500,000 plus restricted stock rule only by disclosure of their compensation and, if requested, a non-binding “say on pay” shareholder resolution. All firms participating in a future capital access program must review and disclose the reasons that compensation arrangements of both the senior executives and other employees do not encourage excessive and unnecessary risk taking. Under the current Capital Purchase Program, the companies were only required to review and certify that the top five executives’ compensation arrangements did not encourage excessive and unnecessary risk-taking.
· Require Provisions to Clawback Bonuses for Top Executives Engaging in Deceptive Practices: The same clawback provision that applies to companies receiving exceptional assistance will apply to those in generally available capital access programs. Thus, in addition to the clawback provision applicable to the top five executives as under the Capital Purchase Program, a company receiving assistance must have in place provisions to claw back bonuses and incentive compensation from any of the next twenty senior executives if they are found to have knowingly engaged in providing inaccurate information relating to financial statements or performance metrics used to calculate their own incentive pay.
· Increase Ban on Golden Parachutes for Senior Executives: Even under generally available capital access programs, the golden parachute ban will be strengthened: Upon a severance from employment, the top five senior executives will not be allowed a golden parachute payment greater than one year’s compensation, as opposed to three years under the current Capital Purchase Program.
· Require Board of Directors’ Adoption of Company Policy Relating to Approval of Luxury Expenditures: This policy will be the same for companies accessing generally available capital programs as it is for those receiving exceptional assistance. There are no guidelines on luxury expenditures under the current Capital Purchase Program.
[These new standards will not apply retroactively to existing investments or to programs already announced such as the Capital Purchase Program and the Term Asset-Backed Securities Loan Facility.]
III. LONG-TERM REGULATORY REFORM: COMPENSATION STRATEGIES ALIGNED WITH PROPER RISK MANAGEMENT AND LONG-TERM VALUE AND GROWTH:
Even as we work to recover from current market events, it is not too early to begin a serious effort to both examine how company-wide compensation strategies at financial institutions – not just those related to top executives – may have encouraged excessive risk-taking that contributed to current market events and to begin developing model compensation policies for the future. Such steps should include:
· Requiring all Compensation Committees of Public Financial Institutions to Review and Disclose Strategies for Aligning Compensation with Sound Risk-Management: The Secretary of the Treasury and the Chairman of the Securities and Exchange Commission should work together to require compensation committees of all public financial institutions – not just those receiving government assistance – to review and disclose executive and certain employee compensation arrangements and explain how these compensation arrangements are consistent with promoting sound risk management and long-term value creation for their companies and their shareholders.
· Compensation of Top Executives Should Include Incentives That Encourage a Long-Term Perspective: Over the last decade there has been an emerging consensus that top executives should receive compensation that encourages more of a long-term perspective on creating economic value for their shareholders and the economy at large. One idea worthy of serious consideration is requiring top executives at financial institutions to hold stock for several years after it is awarded before it can be cashed-out as this would encourage a more long-term focus on the economic interests of the firm.
· Pass Say on Pay Shareholder Resolutions on Executive Compensation: Even beyond companies receiving financial recovery assistance, owners of financial institutions – the shareholders – should have a non-binding resolution on both the levels of executive compensation as well as how the structure of compensation incentives help promote risk management and long-term value creation for the firm and the economy as a whole.
· White House -Treasury Conference on Long-Term Executive Pay Reform: The Secretary of the Treasury will host a conference with shareholder advocates, major public pension and institutional investor leaders, policy-makers, executives, academics, and others on executive pay reform at financial institutions. Treasury will seek testimony, comment, and white papers on model executive pay initiatives in the cause of establishing best practices and guidelines on executive compensation arrangements for financial institutions.