Getting aroud the 'crackdown' on exec pay
Posted
Sep 30 2008, 02:48 PM
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This post is by MSN Money columnist Michael Brush:
Earlier this week House leaders boasted that they added tough measures to the latest version of the financial rescue plan to crack down on excessive pay for executives.
But once again, it looks more like a public relations blitz designed to please the constituents back home rather than a real reform that would have a true impact. (See a related post here.)
Let’s take two of the provisions that got talked up the most: a 20% tax on golden parachutes for execs at any banks that get bailed out and the elimination of corporate tax deductions on executive base pay over $500,000 a year.
That sounds great. But it’s pretty much worthless because banks can still do what they have always done here. They can still pick up the tab on that extra 20% tax on golden parachutes. And they can still simply choose to take the hit on the taxes on base pay over $500,000.
Banks -- like many companies -- have routinely done both of these things for years. There’s no reason to think they wouldn’t continue to get around the so called “limits” in the latest bail out proposal which is likely to get voted on again later this week.
There are other serious shortcomings with measures designed to supposedly cap executive pay at banks getting bail outs, says Paul Hodgson, an executive comp expert at the Corporate Library. He sums up the problems in a report released Tuesday called “Executive Compensation Reform by the Back Door: Pay Provisions in the Bailout Plan.”
Lawmakers, for example, say measures in the bill would limit incentive pay that encourage excessive risk-taking, and even impose outright bans on golden parachutes.
While those provisions are in there, they would only apply to banks in which the government takes an equity stake. “As soon as the stake has been sold, these limits can safely be ignored,” says Hodgson.
Plus, there’s little or no definition of the type of "excessive risk" pay that would be limited, or the limits themselves, says Hodgson.
Another feature, a "claw back" provision forcing executives to cough up incentive pay earned when accounting fraud puffed up earnings, are already covered in the Sarbanes Oxley Act.
What’s worse, lawmakers caved in to opposition to the pay crack down, in two key ways.
Earlier working versions of the House bill give shareholders access to the corporate proxy machinery. That would have made it a lot cheaper for them to run their own candidates for board seats -- candidates who might be better watchdogs over executive pay. That’s now gone. So is a provision that would have given shareholders "say on pay" votes at banks getting bail outs.
The pity here is that by removing these provisions, lawmakers took away two measures that might have started to get at the root issue here: Executives at banks had perverse pay incentives that encouraged them to pump up earnings by doing risky things like writing too many subprime mortgages, or owning debt instruments backed by those risky mortgages.
"There should be no doubt that executive compensation lies at the root of the current financial crisis," says Hodgson. But by taking out these two measures, the House has removed the teeth from pay reform in the bail out bill and replaced them with "a set of very ill-fitting dentures."
Related reading:
Bailout, shmailout. Executive pay still safe.
