Back in September, I wrote a story about how government-mandated restrictions on executive compensation don’t always work the way they’re meant to. Looking at the new rules for companies that sell equity to Treasury, I’m finding, for the most part, more of the same. Let’s go one by one:
Any financial institution participating in the Capital Purchase Program will be subject to more stringent executive compensation rules for the period during which Treasury holds equity issued under this program. The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;
At first glance, that sounds reasonable (unless you’re one of those wacky free-market types who doesn’t think government should be setting salaries)—but I’d really like to know how we’re going to define “excessive risks.” Seems that could get mighty tricky mighty fast. Plus, don’t executives already have a fiduciary responsibility to shareholders to not do things that threaten the value of their financial institutions? We see how far that got us.
(2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate;
As I mentioned last month, the government already has the ability to do this under Sarbanes-Oxley. It’s not exactly a well-used provision.
(3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision;
Okay, this might have teeth.
and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. Treasury is issuing interim final rules for these executive compensation standards.
It’s almost laughable they’re bringing this up again. When Congress instituted this law the first time around—with a $1 million tax-deductibility cap—companies just started paying executives in stock options, deferred compensation, and other goodies. Although I guess a lot of this was added to the bill to improve its chances of passing Congress, and not necessarily to do the things it purports to be able to do. So in that way, it’s worked quite well.