As expected, the White House has just announced new restrictions on executive pay to be issued by the Treasury Department, in response to public outrage over cases of CEOs of bailed out firms raking in millions.
The limits set a limit of $500,000 on executive pay, for those firms receiving “exceptional financial recovery assistance” — that is, firms that negotiated “bank-specific” deal with Treasury, including Bank of America, AIG, and Citi. Any pay beyond that must be made in restricted stock that can only be paid once the government has been paid back.
The restrictions also would give shareholders more say on executives’ pay, and would make it easier for the government to “claw back” the pay of executives who had engaged in deceptive practices, among other provisions.
Last week, President Obama called the billions paid out in Wall Street bonuses last year “outrageous.”
The White House’s press release, with a detailed description of the new rules, follows after the jump …
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release February 4, 2009
Treasury Announces New Restrictions On Executive Compensation
Today, the Treasury Department is issuing a new set of guidelines on executive pay for financial institutions that are receiving government assistance to address our current financial crisis. These measures are designed to ensure that public funds are directed only toward the public interest in strengthening our economy by stabilizing our financial system and not toward inappropriate private gain. The measures announced today are designed to ensure that the compensation of top executives in the financial community is closely aligned not only with the interests of shareholders and financial institutions, but with the taxpayers providing assistance to those companies.
The Treasury guidelines on executive pay seek to strike the correct balance between the need for strict monitoring and accountability on executive pay and the need for financial institutions to fully function and attract the talent pool that will maximize the chances of financial recovery and taxpayers being paid back on their investments. The proposals below, such as emphasizing restricted stock that vests as the government is repaid with interest, seek to strike exactly that balance.
The guidelines distinguish between banks participating in any new generally available capital access program and banks needing “exceptional assistance.” Generally available programs have the same terms for all recipients, with limits on the amount each institution may receive and specified returns for taxpayers. The goal of these programs is to help ensure the financial system as a whole can provide the credit necessary for recovery, including providing capital to smaller community banks that play a critical role in lending to small businesses, families and others. The previously announced Capital Purchase Program is an example of a generally available capital access program.
If a firm needs more assistance than is allowed under a widely available standard program, then that is exceptional assistance. Banks falling under the “exceptional assistance” standard have bank-specific negotiated agreements with Treasury. Examples include AIG, and the Bank of America and Citi transactions under the Targeted Investment Program.
As part of President Obama’s efforts to promote systemic regulatory reform, the standards today mark the beginning of a long-term effort to examine both the degree that executive compensation structures at financial institutions contributed to our current financial crisis and how corporate governance and compensation rules can be reformed to better promote long-term value and growth for shareholders, companies, workers and the economy at large and to prevent such financial crises from occurring again.
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.