Obama to Limit Executive Pay at Companies Getting Aid (Update1)
By Heidi Przybyla and Christopher Stern
Feb. 4 (Bloomberg) -- President Barack Obama will announce today that he’s imposing a cap of $500,000 on the compensation of top executives at companies that receive significant federal assistance in the future, responding to a public outcry over Wall Street excess.
Any additional compensation will be in restricted stock that won’t vest until taxpayers have been paid back, according to an administration official, who requested anonymity. The rules will force greater transparency on the use of corporate jets, office renovations and holiday parties as well as golden parachutes offered to executives when they leave companies.
Public outrage over compensation has been building since October, when Congress passed a $700 billion financial-rescue plan. An $18.4 billion bonus payout in 2008 to Wall Street executives and employees further inflamed Americans.
“People are still getting huge bonuses despite the fact that they’re getting taxpayer money, which I think infuriates the public,” Obama said in an interview last night with CNN.
Obama and Treasury Secretary Timothy Geithner will announce the plan at 11 a.m. today. The guidelines will focus on companies that, going forward, take “exceptional” amounts of bailout money from the Treasury, as Citigroup Inc. and American International Group Inc. have in the past.
They won’t be retroactive to companies that have already taken rescue money, although those companies must agree to strict monitoring and oversight, the official said.
Populist Fury
The populist backlash is hitting the halls of Congress.
Senator Claire McCaskill, a Missouri Democrat who proposed last week a bill to limit compensation, has been inundated with messages from voters fuming over corporate executives. Senator Jeff Sessions, an Alabama Republican, said small-business owners are calling the bonuses “obscene.” Senator Dianne Feinstein, a California Democrat, said her constituents are “really upset,” and Senator Sam Brownback, a Kansas Republican, said he’s hearing about it at the grocery store.
The anger has been fueled by accounts of bonuses, the use of private jets and the purchase of luxury goods.
Those headlines collide with reports of the U.S. losing an average of almost half a million jobs every month, 1.1 million homes being foreclosed upon in the last four months, retirement savings dwindling and bankruptcies mounting.
Severance-Pay Ban
McCaskill’s legislation would block companies from paying executives more than the U.S. president’s $400,000 annual salary as long as the companies rely on federal aid. The compensation cap would cover salary, bonuses and stock options.
“These people are idiots,” McCaskill, 55, said Jan. 30 on the Senate floor. “You can’t use taxpayer money to pay out $18 billion in bonuses. What planet are these people on?”
Senator Byron Dorgan, a North Dakota Democrat, said he plans to introduce an amendment requiring companies that accept bailout money to make their bonuses public.
The complaints over executive compensation have sparked a backlash from at least one executive.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said this week that it’s wrong for politicians to criticize Wall Street pay without differentiating between companies where compensation is commensurate with performance.
“It’s unfair to talk about us as one,” Dimon, who was paid $1 million last year and didn’t accept a bonus, said at a conference in New York. “Not every company was responsible.”
Bad Tradeoff
Still, lawmakers are responding to anger among constituents like Carol Brata, a secretary from Dearborn, Michigan. Michigan has shed 319,700 jobs over the past three years, more than any other state and has the highest unemployment rate, at 10.6 percent.
“They ended up with excessive pay, and the tradeoff was that families had to go without insurance or a job and their homes tumbled,” Brata said.
Thomas Mann, a scholar at the Brookings Institution in Washington, said the anger hasn’t been this pronounced since Franklin Roosevelt took office during the depths of the Great Depression in 1933.
Roosevelt gave voice to a public rage against “a generation of self-seekers,” in his inaugural address. “Practices of the unscrupulous money changers stand indicted in the court of public opinion,” said Roosevelt.
$145 Billion
Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. awarded their employees a cumulative $145 billion in bonuses from 2003 through 2007, according to estimates based on company reports.
That’s more than the annual gross domestic product of the Philippines. Lehman has since gone bankrupt, while Bear Stearns and Merrill have been taken over by commercial banks.
Wall Street firms’ pay has traditionally been tied to performance of the companies. As the bonus portion of employees’ pay has grown, many started to expect it regardless of performance. Some employees have been receiving incentives “for basically turning up,” Barclays Plc Chairman Marcus Agius said last week at the World Economic Forum in Davos.
“There’s this fallacy that everybody will leave” if bonuses are restricted, said William Cohan, a former investment banker at Lazard Ltd. and JPMorgan and author of “The Last Tycoons” about Lazard. “What do they do? They push paper around. Where else can you get paid $500,000 to do that?”
Congressional Hearings
Senate Banking Committee Chairman Christopher Dodd plans to summon executives whose companies received taxpayer aid to testify before his committee and explain their bonuses.
Representative Barney Frank, chairman of the House Financial Services Committee, said executives must accept compensation limits if they want more government aid.
Frank, whose panel will also hold a hearing next week on the subject, said the government’s handling of the crisis “has helped bring public anger to a fever pitch, to the point where it would prevent us from going forward in a lot of ways unless we alleviate it, and you can’t alleviate it with hocus pocus.”
As the public outcry over Wall Street pay escalated, top executives at Morgan Stanley, Bank of America Corp., Goldman Sachs Group Inc. and Citigroup Inc. have agreed to forego bonuses. Governments in the U.K., Switzerland and France have pressured banks including UBS AG and Royal Bank of Scotland Plc to limit executive pay after taxpayer-funded bailouts.
‘Too Draconian’
Bank of America CEO Kenneth Lewis, who was paid $24.8 million in total compensation in 2007, won’t receive a bonus this year after the lender reported a $1.8 billion loss in the fourth quarter, its first deficit since 1991.
Efforts to curb executive pay may backfire, said Scott Minerd, chief executive officer and chief investment officer of Guggenheim Partners Asset Management, who helps oversee more than $30 billion in stocks and bonds.
The Obama measure is “too draconian and too arbitrary, and doesn’t take into account free-market forces,” said Minerd. “Companies that need the most talented people to fix their problems won’t be able to pay them.”
To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net.
Last Updated: February 4, 2009 02:13 EST |
