One of the many provisions of the stimulus package making its way to the President's desk on this President's Day, 2009, addresses restrictions on executive bonuses paid by financial institutions that take Federal Taxpayer Funds.
If the provisions remain as they are before they reach the President -- and the provisions in question were reportedly hotly opposed by the Obama Administration -- they would not enact a pay cap. Rather, the new Federal laws would require the Treasury Department to write new Federal Regulations. The regulations would apply only to financial institutions that have taken Federal Taxpayer bailout funds in the past -- an extension of existing Federal Law -- or that take Federal Taxpayer money in the future.
The New York Times reports that in basic terms, the Act will require that any new Federal Regulations limit the payment of cash bonuses to certain executives until the Federal Loans are repaid in full. "The rules also severely limit retention and incentive pay." Edmund L. Andrews and Eric Dash, "Stimulus Plan Puts New Limiits on Executive Pay" p. A1, col. 5 (New York Times Nat'l Ed., Saturday, February 14, 2009). Other newspapers report that cash bonuses are out entirely, and that the restriction applies to bonus awards, but the new Act now limits bonuses entirely to payment in shares of stock. E.g., Daniel Dombey and Edward Luce, "US Stimulus Clears Congress" (Financial Times.com, Friday, February 13, 2009); Tomoeh Murakami Tse, "Congress Trumps Obma by Cuffing Bonuses for CEOs" (Washington Post.com, Saturday, February 14, 2009). All these newspapers report that the amount of bonus is limited under the new Act to one-third of the banker's total annual compensation.
The linked New York Times article quotes several commentators who are dubious about these new provisions. One is a lawyer at a large firm in Chicago. His law firm lists him on its web site as an "executive compensation" specialist. He is quoted in the article as saying this about the new provisions which address executive bonuses paid by institutions which apply for Federal Funds:
There's no pay for performance in this.
Id. I was mistaken the first time I read this observation, so I re-read it. It is one way to look at the new provisions, I suppose. I just misunderstood.
I first thought that the comment was about existing pay plans. They are not about pay for performance. They are not even about pay for failure. They are just about pay. Regardless of how the corporations fare, the profiteers are paid well.
The thing to remember is that the profiteers at institutions that are not in line for Federal Taxpayer Money are unaffected by the new Federal Laws. Only when the tanking financial institution wants a capital injection of money from Federal Taxpayers would the new Federal Rules apply.
In the interim, does continued adherence to the old rules satisfy anyone's Fiduciary Duties? Is it ever in the best interests of the shareholders of a publicly traded corporation, for officers and employees to be paid extra amounts of money, for failure?
A separate post on potential Insurance Bad Faith Claims on this subject is at www.insuranceclaimsbadfaith.typepad.com.
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