The Golden Parachute Survives
Senator Chris Dodd and Secretary of the Treasury Henry Paulson (WDCpix)
For supporters of the Bush administration’s $700-billion Wall Street bailout, it stands as a key selling point: a provision that limits pay packages for the heads of companies helped by the taxpayer-funded rescue program.
There’s just one problem: It would do little to cap executive pay or rein in the enormous retirement packages — the golden parachutes — that have come to symbolize corporate excess.
Not only is the compensation provision vague, it is punched full of loopholes and leaves many issues of executive pay for the White House to decide later. Legal and political experts say the bill will do almost nothing to limit CEO compensation — even for companies that benefit handsomely from the taxpayers’ generosity.
Illustration by: Matt Mahurin
It wasn’t supposed to be this way.
When Treasury Sec. Henry M. Paulson Jr. unveiled his controversial bailout plan without CEO pay limits, voters were outraged. Lawmakers scrambled to insert a change — responding to the reasonable sensibility that some of the nation’s wealthiest people shouldn’t get a windfall through a bailout necessitated by the crisis many of them helped create. Unfortunately for taxpayers, some experts say, the current bill won’t prevent that from happening.
For example, under current law, businesses may claim a tax deduction for all salaries under $1 million. The bailout plan would lower that ceiling to $500,000 — but only in cases when the Treasury Dept. buys up more than $300 million of the company’s toxic assets, not including those purchased directly from the company. In addition, the salary-deduction rule would apply only to five employees per company. That means participating firms would lose, at most, $2.5 million in deductible claims.
“It’s not even a rounding error for a big financial institution,” said Adam J. Levitin, a credit expert at Georgetown University Law Center.
In addition, as Rep. Brad Sherman (D-Cal.), an opponent of the rescue bill, pointed out, the tax-deduction language targets the companies but has no effect on the executives themselves.
The provisions to end golden parachutes are also plagued with gaping loopholes. The bill does nothing to alter terms of existing contracts, for example, instead allowing retirement packages negotiated before the bailout to proceed. For future employees, meanwhile, the bill would prohibit golden parachutes only when the executive is fired, or the company fails, despite the federal help.
Again, only companies dumping more than $300 million in bad assets are even subject to the golden parachute rules — and it can affect only five employees per company. That means an executive in a corporation receiving more than $300 million from the taxpayer-funded bailout would remain eligible for an unlimited retirement bonanza if that company became profitable and the executive retired voluntarily.
If that sounds vague — it is. The proposal currently asks the Treasury secretary to fill in the blanks after the bill is signed into law.
Another hole big enough to drive through: The proposal does nothing about stock options. So a bailed-out executive could be rewarded now with those options (trading low in the middle of the current financial crisis) and cash in — without penalty — for a windfall later if the company rebounds.
Experts point out why this loophole should be closed: Executives paid in enormous numbers of stock options have incentives to make risky investments — say, mortgage-backed securities — that could send the stock through the roof. Indeed, the AFL-CIO is dedicating its Executive Paywatch Website to the purpose of linking CEO pay to the current credit crisis.
So is everyone. But that could be the point.
Lawmakers want to be able to say they’ve taken steps to control executive pay, while not stepping on too many toes in the powerful financial-services industry — perennially the largest contributor to Washington lawmakers.
Sarah Binder, political science professor at George Washington University and Brookings Institution scholar, said the complicated nature of the compensation issue plays to the political favor of the bill’s supporters. “The details are too confusing for most people to understand,” Binder said.
Levitin agreed, saying that bailout backers “either haven’t read the language or they’re just shilling for the purpose of political cover.”
In Congress, Sherman is not the only House Democrat to raise a red flag.
Rep. Peter DeFazio (D-Ore.) sent a letter to Democratic colleagues this week pointing out seven of the most egregious loopholes of the CEO compensation provision. “If you are considering voting for the bailout because the bill requires the CEOs of Wall Street to take a pay cut,” DeFazio wrote, “you will be sorely disappointed.”
The House killed their version of the bill Monday, but a modified Senate version easily passed the upper chamber Wednesday. Before that vote, Sen. Bernie Sanders (I-Vt.) urged senators to kill the proposal. “Under this bill, the CEOs and the Wall Street insiders will still, with a little bit of imagination, continue to make out like bandits,” Sanders said.
Sen. Christopher Dodd (D-Conn.), the chairman of the Senate banking committee, was quick to respond, calling the bill’s compensation limits “anything but mild.”
“It is the first time ever in the history of the Congress,” Dodd said, “that we are actually going to pass legislation dealing with golden parachutes. More will be done, but this bill does take very concrete, specific actions in that regard.”
All eyes were on the House Friday when it passed the Senate-passed bill, by a vote of 263-171. The legislation was then quickly sent to President George W. Bush, who signed it.
Much has been made of the Senate changes to that proposal — including $150 billion in tax benefits to businesses and families. Yet aside from one provision raising the upper limit on federal deposit insurance from $100,000 to $250,000, nothing substantial has changed within the financial rescue plan that the House rejected the first time around.