Some companies expected to avoid regulation by rejecting recovery

By James Hyatt

The simmering executive pay pot boiled over the first week of February.

President Barack Obama and the treasury department moved to restrict executive pay packages at financial firms receiving “exceptional financial recovery assistance.”

At such firms:

• The policy limits senior executives to $500,000 in total annual compensation, except for restricted stock awards. The stock could be cashed in when the government has been repaid.
• The senior pay structure and strategy at such firms must be fully disclosed and subject to a “say on pay” shareholder resolution.  
• A clawback provision would permit recovery of bonuses and compensation from top executives found to have knowingly provided inaccurate information or performance metrics to calculate their own incentive pay.
• Top executives would be barred from receiving golden parachute payments.
• Boards would have to adopt policies relating to approval of luxury expenditures such as aviation services, office renovations, entertainment and holiday parties.
• The administration said it would host a conference on “executive pay reform at financial institutions” to identify best practices and guidelines.

The president called the new policy “only the beginning of a long-term effort. We’re going to examine the ways in which the means and manner of executive compensation have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system.”

He called for reforms “so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days and weeks.”

The announcement led some banking leaders to signal their firms would try to pay back federal assistance as soon as possible to get out from under the restrictions, and prompted speculation that others would reject aid to avoid the controls.

In a prescient comment in a Wharton School commentary on “CEOs and Market Woes” in December, accounting professor Wayne R. Guay said that for the moment, pay restrictions may be necessary to get support for rescue measures from an angry public and Congress who resent big pay for those who presided over disaster. But he questioned whether making such restrictions permanent would be wise, arguing that big firms “are not going to survive long-term by paying their executives $500,000. They’re just not going to attract the talent.”