(Limited) Executive Pay Limits Slipped into Stimulus

After a day of haggling, a provision to limit bonuses to top executives of bailed-out banks was tucked into the stimulus last night. But for bankers who might be sweating this morning, don’t fret — there are plenty of loopholes. The yacht is safe.

Sponsored by Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, the measure bans bonuses and other incentive-based payments to the highest-paid executives at all companies benefiting from the Troubled Asset Relief Program, or TARP.

The Dodd provision goes further than pay restrictions announced by the Obama administration earlier this month (which apply only to companies receiving “exceptional assistance” under TARP). Still, bailed-out banks will have plenty of opportunity to pay their executives handsomely, even as they accept enormous sums from the federal government.

For example, the Dodd provision sets its bonus-ban based on a sliding scale relative to the amount of help each company receives. For firms accepting less than $25 million from TARP, the ban applies to only the top-paid executive (singular). For banks accepting between $25 and $50 million, the ban extends to the five top-paid executives. Etc. If firms take more than $500 million, the top 20 executives fall under the ban.

Considering the news this week that Merrill Lynch, before being sold to Bank of America in December, paid 149 employees bonuses exceeding $3 million (total: $858 million), the Dodd provision would do little to stem the practice. Indeed, nearly 700 Merrill employees were compensated more than $1 million in 2008, despite the company’s $27 billion loss, The New York Times pointed out Thursday.

The Dodd provision will also “clawback” bonuses from the top executives if those bonuses were based on financial statements “found to be materially inaccurate.” The clawback language will apply only to the top 20 executives. All other bonuses based on inaccurate filings are safe.

Aside from the Dodd provision, two other amendments to crack down on executive pay for TARP recipients — both more strict than the Dodd measure — were in consideration to be included in the stimulus. One would have set a compensation ceiling of $400,000; the other would have forced companies to reimburse Washington for any 2008 bonuses in excess of $100,000.

Both were removed during conference negotiations.

So much for our grand meritocracy.