Obama’s Executive Comp Proposals: Closing the Gate After the Horse is in the Next County

I believe I am permitted to hyperventilate only once in an evening, so I’ll have to act with a modicum of restraint here.

The Obama executive compensation restrictions for bailout fund recipients have been leaked, and may be long enough on appearances to appease an angry US electorate.

But the shortcomings of the supposedly tough plan, with a pay cap of $500,000 (plus stock dividends, if any) are many, even though some executive comp stooges experts dutifully declaimed how truly awful and unreasonable it was:

“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”

Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits will make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms.

“It would be really tough to get people to staff” companies that are forced to impose these limits, he said. “I don’t think this will work.”

A sense of entitlement is most certainly entrenched. When Lee Iacocca groveled (and he had to grovel) to get a bailout of Chrysler (which was a loan and the deal in the end was profitable to Uncle Sam) he offered to take a $1 salary. I am pretty sure his top team did not take that little, but I would be stunned if they did not rein in they take considerably.

But before we get too far ahead of ourselves, here are the key measures,although reading the Wall Street Journal, the New York Times, and Bloomberg, there is not a convergence of detail, and some plan elements may not yet be finalized:

1. Pay cap of $500,000, apparently for “top executives” (presumably the usual suspects, the five listed in the proxy) excluding dividends on stock. Any other pay will be in the form of restricted stock that will not vest until taxpayers have recouped their commitment

2. Other restrictions on the top 50 (bonus pools to shrink 40% from 2007 levels)

3. No severance pay for CEOs at firms receiving “exceptional” assistance

4. Limits on corporate jets, office renovations and holiday parties

Let’s look at what this does not address:

1. It appears no attempt to take measures relative to the funds committed. We said loud and clear that we didn’t see a way to claw back payments already made (although one reader suggested barring them from working in any licensed financial institution unless they disgorged some of the dough). However, if I read the plan correctly, the restrictions will be imposed ONLY on those receiving NEW dough. Huh? I can see not imposing this retroactively (that would be a stretch, but I’d be curious if anyone had a legal theory and mechanism by which that could work) but how can AIG and Citi, the two biggest black holes, not be subject to the rules going forward based on what they have taken down to date?

2. Further pay restrictions, but limited to the top 50. Ahem, in most big banks, there were a hell of a lot more than 50 people making well over a million. The number is nowhere near large enough. And I suspect it will lack restrictions on related entities (just wait for a bank to spin a pet group out but still retain a considerable economic interest and provide funding and/or office space).

How clearly “substantial assistance” is defined will also be telling.

Amusingly, they arrived at $500,000, which was my back of the envelope MD pay in bad market, adjusted for inflation, estimate.

Another tidbit per the Wall Street Journal:

Mr. Obama is expected to announce mandatory “say on pay” requirements, which would give shareholders a vote on executive compensation, long an item on the wish-list of shareholder activists. Mr. Obama introduced legislation to give shareholders a say when he was a senator, though the bill didn’t become law.

The big failing, aside from not going deep enough into these firms, that it addresses the level, not the structure, of pay. Yes, the banks appear to need to be reined in forcibly. Amazing cheek, and their utter lack of sense and propriety brought it upon them, although I see plenty of room to play games were anyone so keen to do so (the real check is leaks from disgruntled employees, but even then, by the time the word gets out, as with the 2008 bonuses, the checks have cleared and the damage is done).

But there is no effort to root out the real cancer: asymmetrical incentives, namely, bonuses based on single year performance, when the risk of actions taken often extends into the future. As we have seen, without the check of private ownership, you get undue risk taking and massive blowups (amazing, isn’t it, that this system worked just fine when the money of the people issuing the bonuses was at stake?) So if the industry ever recovers, we can look forward to a repeat of this cycle, although perhaps at lower amplitude.

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  1. Anonymous

    Yves, your posts at 1.45, 3.03, 3.53, 4.57 and 5.32 AM. Please get some sleep girl, you deserve it.

  2. dailybail

    yves, keep after the bastards.

    “we exist to fight the immoral transfer of trillions in debt from private banks onto the backs of future generations. If not stopped there will be $10 trillion of debt created by our government in the next five years. and most of it given to the banks. That amount is equal to our entire national debt for our first 232 years as a nation.

    We’re here to keep tabs on the heist. To provide an official daily record of the generational pillaging.

    A special messge to young people finding us through Twitter. This is Your Revolution and you need to help lead it. With respect, you need to wake the f up and understand that it is primarily your cash headed out the door and straight to the failed banks.”

  3. MarcoPolo

    $500,000. I’d take it and I couldn’t do worse than some of those jerks. Seriously, what are we looking for when we look for talent?

    The real talent of these corporate leaders is knowing how to land on their feet.

  4. Anonymous

    Based on these rules, Goldman executives, traders, and i-bankers will be let off the hook. Given that the $185 billion used to save AIG was actually used to save Goldman, how does that make sense? And does “exceptional assistance” include backstops, guarantees, being allowed to trade in toxic assets for treasuries, and all the other measures already taken that has saved these banks? Ugh!

  5. Neo

    The Senate bill includes a tax break worth up to $246 million over 11 years for investors in bigger-budget movie projects that don’t necessarily qualify for incentives currently. The provision is backed by firms like the Walt Disney Co., and the industry trade group the Motion Picture Association of America, according to aides and lobbyists.
    Isn’t time for Hollywood actors to do the “patriotic” thing and buck up with pay caps, just like those that “The One” thinks should be in the “stimulus” and “bad bank” bills for Wall Street ?

  6. Confused2L

    I know its been frequently stated that there is no way to clawback bonuses, and I realize a large portion of the argument rest on the fact that there isn’t the political will, and because its implicitly accepted to be impossible in the media. But I wondering there is any structural flaw, as opposed to practical, in either of the two arguments for clawbacks:

    1) With respect to directors and officers, the excess bonuses could be construed of a violation of the Duty of Loyalty, and damages should be awarded to the corporation by those individuals.

    This argument could even become plausible if the government or its trustees eventually wind up as board members.

    2) The companies in question could be found constructively bankrupt at the time of transfers, allowing the payouts to be found retroactively invalid.

    I realize option 2 is far more implausible, but even enforcing a clawback on the officers of the corporations would be a giant leap forward.

    Another question that just occurred to me, is there anyway for creditor or counter-parties to force a entity into bankruptcy against its will? Especially where it fraudulently misstates its assets to appear solvent?


  7. Anonymous

    I would call it a feature rather than a bug if the companies can’t retain greedy execs. In this market it’s probably easy to find despe^H^H^H competent replacements.

  8. john bougearel

    I got so mad reading this piece last night I had to write the BN author Heidi Przybyla “This is crap. As per your Feb 4 piece, this announcement is effectively meaningless. this only applies to forward bullshit – nothing retroactive means no teeth. “They won’t be retroactive to companies that have already taken rescue money, although those companies must agree to strict monitoring and oversight, the official said.” This legislation is crap and infuriating!

  9. buzzp

    Why don’t we just return to the good old days – unlimited liability for the bankers, their personal fortunes at stake? I would be very interested in any research that looks at the advent of limited liability in banking and how it correlates to the run-up to this crisis.

  10. DailyBail

    Down goes Frazier.
    Down goes Frazier.
    Down goes Frazier.

    Howard Cosell broadcasting Frazier’s Fight with Ali.

    Taxpayer is now Joe Frazier.

    This morning Squirrel links are up. 30 stories and counting in one link.

    Yves you are in there 3 times. Thanks for being so outraged. We need it.

    Click on my name for the links. enjoy.

    spread the link to help the cause of stopping the generational pillaging.

    seriously. it’s so little to ask when so much is at stake.

    start calling congress and the white house today.

    the battle has begun.


  11. DoctoRx

    It’s not clear what the hyperventilation-inducing part is. Let’s be clear, this is all PR on Mr. Obama’s part. He was happy to have a $2 M/year non-registered lobbyist be his health care czar, even after he found the man was a tax evader.

    Yves says: “the banks appear to need to be reined in forcibly”. Forcibly?

    Let us hear both Yves and Mr. Obama call for $500,000/year restrictions on athletes and entertainers. Remember that when George Mitchell ran the Senate, they got the whole options mess going by limiting tax-deductibility of exec salaries over $1 M (and this was many years ago). But they exempted reliably Democratic voters and donors, specifically athletes and entertainers.

    A recent study found that adjusted for educational level, finance jobs were 40% overpaid.

    I have urged on my blog a different solution, to wit:
    Basic depository bank services be treated like electric and water/sewer utilities, so they always are on.
    More adventurous stuff is truly private but regulated only to the extent that it cannot be systemically threatening. Let people make or lose as much as they want. Inherent in that situation is the need to completely ban most derivatives. Nassim Taleb proposes that only conventional options survive the derivative ban.

  12. Andrew Bissell

    The problem with populism is that boobus americanus is apparently completely incapable of perceiving which politicians are really looking out for him, and which are just making a big show to cement their power and steal a base for their buddies.

    Genuine, principled adherence to liberty & the Constitution is apparently a much more pragmatic approach. Who could have known?

  13. Independent Accountant

    Thomas Frank has a related article in today’s WSJ, “Bankers would prefer a global disaster to a pay cut, in other words, and this obscene calculation needed to be taken into account. Public outrage was apparently nothing by comparison. … Maybe, in its fury at the millions doled out to bankers who drove their institutions into the ground, the public understands something about moral hazard that the Treasury Department doesn’t. … Wall Street’s compensation system isn’t just aethetically displeasing to liberal snobs. It is the very heart of the problem”. Amen. My answer: indict and indict, convict and convict and imprison and imprison. I don’t want to hear any of that nonsense that the SDNY US Attorney can’t find something to use to incarcerate characters like: Fuld, Blankfein, Mozzillo, et. al. Of course, we would need a SDNY US Attorney with no Wall Street connections. Good luck.

  14. Martin

    So, (1) only a handful of people at a big bank will actually “suffer”, if that is what one should call $ 500.000 per year; (2) lots of traders will have exactly the same asymmetrical, short-term incentives to take crazy risks at the American taxpayer’s expense; (3) of all the millions looted over the past years, exactly $ 0.00 has to be paid back. Big deal. Why not just nationalize the banking system? This way, billions and billions will continue to bee poured into this black hole without the people having any significant influence on how the banks are run.

  15. Anonymous

    I think using a multiplier rule would have been simpler than a flat number. “No one in the company can make more than 10 times the lowest paid employee” or thereabouts would do nicely.

  16. Anonymous

    DoctorRX said: “Let us hear both Yves and Mr. Obama call for $500,000/year restrictions on athletes and entertainers. Remember that when George Mitchell ran the Senate, they got the whole options mess going by limiting tax-deductibility of exec salaries over $1 M (and this was many years ago). But they exempted reliably Democratic voters and donors, specifically athletes and entertainers.”

    At this point it’s beyond reasonable doubt that somebody does not know that athletes’ and entertainers’ salaries are set in a much more market-based manner than top executives at large firms, who frequently work in a crony capitalist system, where the CEO of firm A is on the board of firm B, and vice versa.


  17. Patrick

    If Citi has Gov’t guarantees on $100 BB of toxic assets, and in March, some of that toxic stuff goes poof and the Gov’t backstops the position and gives Citi cash, wouldn’t that be new money and instantly Citi is held to this compensation deal? In other words, AIG and CITI are going to get more money in the future, whether they want it or not, and then will be subject to Obama’s rule? Or am I not understanding the nature of the Gov’t guarantees?

  18. Anonymous

    Weighted stock compensation in both bad and good banks or in invested equally in present marks on bad assets and company stock

    Stock compensation proportional to realised prices or realised yields of bad assets

  19. Anonymous

    Let us hear both Yves and Mr. Obama call for $500,000/year restrictions on athletes and entertainers

    When they recieve TARP funds I would agree. however, since they didn’t ruin the world economy I doubt they will.

  20. Anonymous

    Capping CEO bonuses, salaries and perks is a cheap populist trick considering that they’re getting off easy. Oh, please don’t throw me in that briar patch…

    I agree with Mish Shedlock on the whole thing…let them experience the real consequences. They’re getting off cheap, thanks to Obama.

    The Government has already guaranteed $400 billion in bad debts of Citigroup and Bank of America. Now Geithner wants more. Note that the market cap of Citigroup (C) is roughly $19 billion and Bank of America (BAC) is roughly $27 billion. The treasury is guaranteeing $400 billion of debt on companies that would be worthless without those guarantees. Does this make sense?


    Instead of being fired for incompetence, executive salaries will be capped at $500,000.

    For the record, I am not in favor of salary caps, especially caps imposed by the government. I am in favor of letting the free market work. What would happen under a free market approach is these executives would be out on their ass and their companies bankrupt and sold off in pieces.

    Triage for Troubled Assets.


  21. fresno dan

    Yves “Limits on corporate jets, office renovations and holiday parties”
    Not a word about strippers or cocaine. Or booze. Or Rock and Roll. The money will all go up in an orgy of coked out bankers doing medalies with aging (but expensive) rock and rollers, with strippers. Yup

  22. Anonymous

    Price controls do not work. These fellas know it. The biggest heist in history occurred after compensation was capped under Clinton at $1M, after which limit the IRS ruled corporations would be taxed.

    The unintended consequence was a work-around using stock options for compensation. The rest is history.

    Obama’s juxtaposition of Daschle v Geithner’s treatment is indicative of his character and political capture. He is indeed a demagogue.

    Geithner, while the face of our American system of plunder, is shamelessly retained by the great retainer after being found out as a blatant tax cheater while Daschle, a dedicated, trusted public servant who could have been given the benefit of the doubt for committing an honest mistake is further humiliated with a presidential TV appearance on morals.

    Taking a page out of the far right’s play book, Obama uses the bully pulpit, going on national TV with a distracting cheap shot on morality while perpetuating the plunder represented by Geithner.

    Risking Daschle’s destruction has thrust another knife into the heart of public service while vindicating Geithner demonstrates Obama’s capture by the system Geithner represents.

    I wish it weren’t so.


  23. Anonymous

    It’s a start and a friggn hell of a lot more than Bush and Paulson did!!!

    “This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success,” Obama said. “But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers.”

    The pay cap would apply to all institutions that have negotiated agreements with the Treasury Department for “exceptional assistance.” Those would include American International Group Inc., Bank of America Corp., and Citigroup Inc.

    Firms that want to pay executives above the $500,000 threshold would have to use stock that could not be sold or liquidated until they pay back the government funds.

    Generally healthy institutions would have more leeway. They also face the $500,000 limit if they’re getting government help, but the cap can be waived with full public disclosure and a nonbinding shareholder vote.

    Obama said that massive severance packages for executives who leave failing firms are also going to be eliminated. “We’re taking the air out of golden parachutes,” he said.

  24. Philip

    Why not a hefty “excess profits” tax, levied on those employed by financial institutions receiving bailouts, or more broadly, anyone employed in the financial services industry? I don’t care about clawing back the money for the companies? Let’s claw it back for the benefit of the taxpayers. I’m not sure there is any limitation on retroactive taxation of income received in 2008 and earlier years, but I assume that a tax passed this year could apply to bonuses and other moneys actually received this year.

  25. Anonymous

    Yes, it’s socialist, but it’s no different than what we do in the NFL, NBA, or NHL to limit the pay of performers for no reason.

  26. Harry Tuttle

    Why 2007 levels?

    The reason why they are so generous with the bankers while trying to appear tough is quite obvious. How old is Geithner? where will he likely end after he leaves the Treasury.

    So much for change we can believe in.

  27. Anonymous

    article quotes wsj:

    “Mr. Obama is expected to announce mandatory “say on pay” requirements, which would give shareholders a vote on executive compensation, long an item on the wish-list of shareholder activists. Mr. Obama introduced legislation to give shareholders a say when he was a senator, though the bill didn’t become law.”

    This is a good idea only if it requires mutual funds to pass those voting rights on to their shareholders. Otherwise too much power is concentrated with mutual fund managers.

    I want mutual fund voting rights NOW, not only for “say on pay”, but all issues that shareholders have a right to vote on.

  28. Paul W

    If the banks go into bankruptcy, and the bondholders take a loss (as they should), they can attempt to claw back prior compensation.

    The above scenario happens to also be the best for the tax payer. We are not going to see the impetus for this solution from this already very disappointing administration.

  29. Benjuano

    Holy S*** what does this ass hole mean 500,000 dollars is not alot of money? i could live the next ten years of my life paying for school food housing with cash to spare if i had that much money. stupid rich people need to humble up and realize you need to do a good job to get lots of money not fuck up our economy and beg for the poor people to bail you out with their taxes. the person who wrote this article is a dutch

  30. Anonymous

    Did it occur to Obama that many managers at the Directors, VP, etc. level make more than $500,000?

  31. Eric L. Prentis

    Proposed cap on executive salaries who receive TARP funds, I hope not but, it sounds like mere window-dressing to placate the masses. Slimy-on-the-take, fascist/corporatist politicians don’t want to jeopardize their ability to stuff failed banks full of taxpayer money.

  32. DoctoRx

    Agree w Anon at 12:01 PM and w Lee Anne. Mish has it right. Barry Ritholtz has it right. The insolvent companies should be wound down in an organized fashion. Barack Obama voted for TARP. Caps on exec salaries could have been instituted then. SEE Yves’ title of this post! And Tim Geithner was at the center of all the “saving” of the money-center banks.

    This beating up on exec salaries appears hypocritical; I think that was kind of the point of Yves’ post and the title she chose.

    Nassim Taleb (Black Swan) recommends that basic banking (depository) functions be either governmental, or I would suggest regulated a la utilities. The gambling part of financial institutions, he feels, should be much more free market, but regulated so there are NO bailouts and NOT a threat to the basic depository system; and he favors banning all derivatives more complex than simple options.

    In that setting, I don’t care if someone such as John Paulson or whomever makes a billion dollars a year.

    I was against TARP from day one, but consider that government is more or less everywhere in this economy. If it can tell a private company where it has provided a financial benefit what to pay, where does that end? If the govt actually owns the bank, then it can pay govt wages.

  33. Anonymous

    In the case of the bankers, we can go after them for Fraud.

    They committed their organisations to potential and now actual liabilities, way beyond their ability to pay, in fact many multiples beyond. They did that purely to get the income from upfront payouts on the Derivatives they sold, to fill their bonus’.

    That is plain fraud, they knew damn well that they could never pay out.

  34. Ted

    While it should go without saying that even a legitimate President’s “ordered” $500,000 pay cap is an unenforceable intrusion into the private sector, as if that weren’t enough, Obama LACKS EVEN OSTENSIBLE AUTHORITY to issue the order UNTIL HE OVERCOMES “RES IPSA LOQUITUR” BY SUPPLYING HIS LONG FORM BIRTH CERTIFICATE AND PROVING HIS ELIGIBILITY TO BE PRESIDENT UNDER ARTICLE 2 OF THE US CONSTITUTION.

  35. Anonymous

    I agree with this statement: Very funny – would an exec comp consultant ever back any type of a salary cap?…I just don’t see this happening! I watched a video at newsy.com that asked the question if whether or not putting a pay cap on will have a positive or negative affect. What do you think?


  36. Jimy

    Had any of the investment banks remained as partnerships or were privately owned (private equity-owned companies are an exception), there would be no room for absurd bonuses and compensation. Once the investment banks are allowed to go IPO and therefore start betting on other people’s money with no regards for risks and flouting all reasonable guidelines on compensation, we had series of financial crises starting with LTCM. One could easily blame regulatory oversight and Greenspan for abetting all the hanky panky, but the root cause is allowing the IBs to go public. As the stock options back-dating issues with tech companies show, it is difficult to change this mindset of “privilege” when it comes to compensation.

  37. lineup32

    A PR move by Obama, means nothing except he and his adm is starting to feel the public pulse which doesn’t think much of his idea of change.

  38. Anonymous

    This should have been done a long time ago. And $500,000 is even a lot for these so called executives that took their shareholders to zero while they were reaping bonuses. Now they want to keep on getting paid and keep on squandering tax payer’s money. This had to be stopped. Some will argue that talent will be gone.. What talent? The only talent they had is to pocket money for themselves. Anybody could have done a much better job. And let’s not go in the moral hazard these guys bare. I wonder how much these bankers lost in this stock market crash. I would not be surprised if a lot of them shorted personally their peer banks because regulation did not permit to do it with the banks they work for, like the CEO’s of City National and Chase did in 1928-29. Not only they deserve to make $500,000 or even less, they should be made to return all the money they took and which they do not deserve in the first place. All those earnings they were reporting were lies, plain lies. Paper earnings…Somebody tell me the difference between Madoff and Pandit or Blankfein, or Lewis..The first one confessed of making money out of nothing. The other group did the same but under the protection of the so called regulators…Madoff run a $50 billion Ponzi scheme. The banks run a $4 trillion one…

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