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Executive Compensation Limits: The Loopholes

With Treasury Secretary Tim Geithner by his side, President Barack Obama just announced the highly anticipated new executive pay limits for companies receiving taxpayer help under the $700 billion Troubled Assets Relief Program.

“In order to restore our financial system, we’ve got to restore trust,” Obama said. “And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street.”

And while the rules certainly go further than the Bush administration ever attempted, several loopholes stand out:

First, the $500,000 pay limit doesn’t apply to each executive — only to “senior executives.” And those senior executives will remain eligible for unlimited stock options as long as they don’t cash in while the company still owes the government money, or “after a specified period according to conditions that consider among other factors the degree a company has satisfied repayment obligations, protected taxpayer interests or met lending and stability standards.”

Second, the cap won’t apply to all companies bailed out by taxpayers. Instead, the Treasury will distinguish between firms benefiting under the “standard” TARP program and those receiving “exceptional assistance.” Only the latter group is subject to the cap.

Third, the ban on golden parachutes doesn’t apply to each executive — only to the 10 highest paid executives. Again, only companies getting exceptional assistance are subject.

Fourth, the new limits apply only to companies accepting TARP funds in the future. That is, an untold portion of the $350 billion or so that’s already out the door might still wind up in the pockets of the same executives who ran the companies into failure.

Fifth, a “claw back” rule requiring executives to return bonuses and other compensation-based pay that was based on deceptively erroneous financial statements applies only to the top 20 executives of the company. So the 21st guy on the list who knowingly gave inaccurate figures, and was paid a bonus for the fib, gets to keep that bonus.

A White House press release attempts an explanation of the laxity, saying the guidelines “seek to strike the correct balance between the need for strict monitoring and accountability on executive pay and the need for financial institutions to fully function and attract the talent pool that will maximize the chances of financial recovery and taxpayers being paid back on their investments.”

One wonders if the public will agree.

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