Critics say Treasury plan may not curb CEO pay

NEW YORK/WASHINGTON (Reuters) - New rules limiting executive payouts at U.S. banks participating in a federal cash infusion plan may not rein in CEO compensation at all because the language is vague and subject to government interpretation, critics say.

The pay rules were detailed on Tuesday as part of U.S. Treasury Secretary Henry Paulson’s plan to inject $250 billion into U.S. banks in a bid to shore up confidence.

Critics say that while the pay limits do place some restrictions on things like so-called “golden parachutes” awarded to departing executives, the rules overall set no precise limits on corporate leaders’ compensation.

The Treasury Department says banks that accept the cash infusions must ensure that compensation does not encourage executives to take “unnecessary and excessive risks that threaten the value of the financial institution.” But the rules do not define those risks and many question who will decide what is excessive.

“Without clear limits on pay, the public is being asked to put their trust in Secretary Paulson, a man who made hundreds of millions of dollars as a Wall Street CEO, to decide what’s ‘excessive,’” said Sarah Anderson, a pay expert at the Institute for Policy Studies, which has pressed for CEO pay curbs.

Anderson said “a bailed-out bank board of directors would be perfectly free to funnel $10 million into its CEO’s pockets -- unless Paulson decides that reward poses an excessive risk to the institution.”

Bill Coleman, chief compensation officer at, a company that tracks pay matters, said it’s unclear who will judge whether pay plans for top executives encourage risky behavior or not.

“I’m not convinced that we have the ability to really monitor those things,” Coleman said.

He said the plan to curb pay was “a necessary gesture, but the devil is in the details.”

Paul Hodgson, senior research associate at corporate governance group The Corporate Library, called the incentive compensation provision “very subjective” and said the language is too vague.

“Not only is it too vague to apply, but it’s too vague to understand what they mean by that,” said Hodgson.


For decades, lawmakers have tried to restrict how much corporate executives earn. However prior legislation, including caps on salary that companies can deduct from their corporate tax bills, have sometimes backfired because companies found other ways to reward executives through things like performance pay and stock options that were not subject to the caps.

Now that a number of big banks have failed, policymakers have taken another stab at reining in executive pay.

The Treasury Department also has set up other plans for limiting pay for companies taking part of the bailout package, in response to demands from some lawmakers troubled by the prospect of rewarding CEOs whose companies are in trouble. Wall Street chiefs have long been among the best paid in Corporate America.

The provisions single out the chief executive, chief financial officer and next three most highly compensated executive officers of financial institutions.

Under the rules, companies getting cash from the government must agree to “claw back” any bonus or incentive compensation paid to a senior executive based on certain statements later proven to be materially inaccurate.

Another provision bans companies from deducting compensation in excess of $500,000 for each senior executive from their corporate taxes. Previously, the bailout legislation had placed a $500,000 cap on tax deductibility only to firms that were to sell assets to the government.

“The most critical component is that (Paulson) indicated that any financial institutions selling shares would be subject to the restrictions,” said Jay Brown, a securities professor at University of Denver Sturm College of Law.

Bank of America Corp, Wells Fargo, Citigroup, JPMorgan Chase & Co, Goldman Sachs, Morgan Stanley, Bank of New York Mellon Corp and State Street have agreed to sell preferred stock to the government, according to media reports.

Investor groups are nervous the rules will be watered down.

“Our fear is that Treasury will create a weak standard and a lot of this will be window dressing,” said Richard Ferlauto, director of pension and benefit policy at labor group American Federation of State County and Municipal Employees. The group has lobbied for ‘say on pay’ legislation to give shareholders more influence on the pay packages of executives.

Rep. Barney Frank, chairman of the House Financial Services Committee, is expected to revisit “say on pay” legislation early next year, an aide said on Tuesday. The House of Representatives has passed a “say on pay” bill, but the legislation stalled in the Senate.

Additional reporting by Kevin Drawbaugh in Washington, editing by Richard Chang