Obama Restricts Executive Pay

Sources: Financial Times, Obama Gets Tough on Executive Pay; New York Times, U.S. Plans $500,000 Cap on Executive Pay in Bailouts

Just a few days after Pres. Obama expressed outrage over “shameful” Wall Street bonuses in the middle of the worst economic crisis in decades, he issued new restrictions on executive compensation at companies receiving “exceptional assistance” from the government. Obama’s announcement is a proactive measure to assuage taxpayer anger over “executives being rewarded for failure” with “subsidi[es from] US taxpayers.” Last week, the New York Times reported that Wall Street firms paid over $20 billion dollars in executive bonuses at the end of 2008.

The restrictions cap top-executive compensation at targeted companies at $500,000 per year and ban bonuses above base pay, except in the form of restricted stock, which cannot be sold until the government is repaid. The restrictions exempt companies that received aid through the TARP program if those companies fully disclose executive pay and hold a non-binding shareholder vote. Only about twenty-five of the top jobs in an affected company are affected by the restrictions; other jobs can still pay more.

Administration officials said the restrictions are not retroactive, and officials from banks that have already received emergency capital injections and bad-asset guarantees from the government (like Citigroup, AIG, and Bank of America) indicated they have no intention of changing their executive compensation policies.

Most companies that government funds through TARP were considered “healthy” (rather than on the brink of collapse) and thus won’t be subject to the restrictions. Additionally, the TARP program already imposes some executive-pay restrictions—but Pres. Obama’s are much tougher than those in place now. However, as the recession deepens and firms are still struggling, many companies plan to go back to Congress to ask for more money—and will most likely be subject to the new restrictions. There are concerns that restricting executive pay to such a “minimal” amount will make it hard for those struggling firms to recruit and retain talent—talent that a struggling firm needs during tough times.

Questions for Discussion: Are Pres. Obama’s new rules a long time coming? Do you think they will work? Is there a better way to “rein in Wall Street” and achieve transparency?