Post by Tim Collins on Feb 4, 2009 5:26:58 GMT -7
www.forbes.com/2009/02/04/obama-geithner-tarp-biz-wash-0204_compensation.html
TARP
CEO Pay Curbs Could Extend The Crisis
Brian Wingfield, 02.04.09, 6:00 AM ET
WASHINGTON -- Now we get to find out who really needs a taxpayer bailout.
Wednesday morning, President Barack Obama and Treasury Secretary Timothy Geithner are expected to announce strict limits on executive compensation for banks and other companies that receive money from the Troubled Asset Relief Program, or TARP.
The idea sounds noble enough. Even as they have accepted billions of dollars in taxpayer money to keep the doors open, bosses at companies such as General Motors, AIG, Bank of America and Citigroup have been pilloried for their lavish lifestyles. The display of luxury corporate jets, million-dollar bonuses and executive suite redecorating all but invites Uncle Sam to step in at a time when hundreds of thousands of Americans are losing their jobs.
But if the government’s not careful, the executive pay limits could end up making the economic crisis worse. It depends how tight the limits are.
Tuesday night, The New York Times reported that companies accepting TARP funding would be required to cap the pay of their top executives at $500,000. The rules reportedly would also prohibit executive bonuses, aside from the usual dividends paid on company stock.
It wasn’t clear whether the restrictions would be retroactive for executives at companies that have already accepted TARP money, as some members of Congress have proposed. Officials at the White House and the Treasury Department did not return calls for comment.
What’s the danger in the reported Obama plan? The most common argument is that excessive restrictions on what top executives earn could drive away talent from the companies that perhaps need a bailout the most. Why take a job at a place that’s in need of a turnaround if there’s little reward at the end of the day?
In addition, tight executive pay limits threaten to draw a bright line between healthy banks and non-healthy banks, causing investors to flee the latter group. The banks that received TARP money from the first half of the bailout pool include relatively healthy institutions like JPMorgan Chase and Wells Fargo (compared to, say, Citigroup or AIG, which threatened pull the system down if they failed). Dozens of regional banks have also received TARP funding in recent weeks.
However, if the executive compensation limits are too strict, banks that are in desperate need of taxpayer cash just to stay afloat might be the only ones to accept TARP funding. Of course, there’s an argument to be made that that if a bank is in such dire straits, it already should have slashed its executive pay. But if an institution takes government money, the signal to investors could be "get out now."
A final reason why the executive compensation restrictions could exacerbate the crisis is that it might impose an additional hurdle to get banks lending again. As haphazardly as the TARP program was administered in the last months of the Bush administration, it was designed to help banks improve their capital reserves so that the financial system could regain its footing--not to create more consumer loans immediately; that comes after the system is removed from life support.
It’s not clear how strict limits on executive compensation could help banks attain the eventual goal of lending at normal levels again. If fewer banks accept TARP money because they don’t want to place salary shackles on their top bosses, it's possible that any potential thawing of the credit freeze so far could come to a halt.
Just as the details of Obama’s plan haven’t been revealed, neither have the loopholes. Critics of the government’s previous executive compensation limits attached to TARP money have argued that restrictions on bonuses and golden parachutes alone do nothing from preventing a firm from offering an executive an astronomical salary to compensate. Some chief executives tapping the TARP earn a modest salary but receive the bulk of their compensation in company stock, which could become a more prevalent practice if companies want to retain or attract talented executives.
The Obama administration had indicated that it would make an announcement on executive compensation limits this week, but the plan he’s expected to announce Wednesday seems to be a clear example that he’s trying to regain control of the news.
Obama is lobbying for quick passage of a nearly $900 billion fiscal stimulus plan, which is slowly getting picked apart by opponents in the Senate. And he’s coming off a tough Tuesday, when two of his choices for top posts--including the nominee for Health and Human Services secretary, Tom Daschle--withdrew from consideration over tax troubles.
His administration is only two weeks old, but for Obama, there’s no better time than the present to take a hard line against corporate largesse.
TARP
CEO Pay Curbs Could Extend The Crisis
Brian Wingfield, 02.04.09, 6:00 AM ET
WASHINGTON -- Now we get to find out who really needs a taxpayer bailout.
Wednesday morning, President Barack Obama and Treasury Secretary Timothy Geithner are expected to announce strict limits on executive compensation for banks and other companies that receive money from the Troubled Asset Relief Program, or TARP.
The idea sounds noble enough. Even as they have accepted billions of dollars in taxpayer money to keep the doors open, bosses at companies such as General Motors, AIG, Bank of America and Citigroup have been pilloried for their lavish lifestyles. The display of luxury corporate jets, million-dollar bonuses and executive suite redecorating all but invites Uncle Sam to step in at a time when hundreds of thousands of Americans are losing their jobs.
But if the government’s not careful, the executive pay limits could end up making the economic crisis worse. It depends how tight the limits are.
Tuesday night, The New York Times reported that companies accepting TARP funding would be required to cap the pay of their top executives at $500,000. The rules reportedly would also prohibit executive bonuses, aside from the usual dividends paid on company stock.
It wasn’t clear whether the restrictions would be retroactive for executives at companies that have already accepted TARP money, as some members of Congress have proposed. Officials at the White House and the Treasury Department did not return calls for comment.
What’s the danger in the reported Obama plan? The most common argument is that excessive restrictions on what top executives earn could drive away talent from the companies that perhaps need a bailout the most. Why take a job at a place that’s in need of a turnaround if there’s little reward at the end of the day?
In addition, tight executive pay limits threaten to draw a bright line between healthy banks and non-healthy banks, causing investors to flee the latter group. The banks that received TARP money from the first half of the bailout pool include relatively healthy institutions like JPMorgan Chase and Wells Fargo (compared to, say, Citigroup or AIG, which threatened pull the system down if they failed). Dozens of regional banks have also received TARP funding in recent weeks.
However, if the executive compensation limits are too strict, banks that are in desperate need of taxpayer cash just to stay afloat might be the only ones to accept TARP funding. Of course, there’s an argument to be made that that if a bank is in such dire straits, it already should have slashed its executive pay. But if an institution takes government money, the signal to investors could be "get out now."
A final reason why the executive compensation restrictions could exacerbate the crisis is that it might impose an additional hurdle to get banks lending again. As haphazardly as the TARP program was administered in the last months of the Bush administration, it was designed to help banks improve their capital reserves so that the financial system could regain its footing--not to create more consumer loans immediately; that comes after the system is removed from life support.
It’s not clear how strict limits on executive compensation could help banks attain the eventual goal of lending at normal levels again. If fewer banks accept TARP money because they don’t want to place salary shackles on their top bosses, it's possible that any potential thawing of the credit freeze so far could come to a halt.
Just as the details of Obama’s plan haven’t been revealed, neither have the loopholes. Critics of the government’s previous executive compensation limits attached to TARP money have argued that restrictions on bonuses and golden parachutes alone do nothing from preventing a firm from offering an executive an astronomical salary to compensate. Some chief executives tapping the TARP earn a modest salary but receive the bulk of their compensation in company stock, which could become a more prevalent practice if companies want to retain or attract talented executives.
The Obama administration had indicated that it would make an announcement on executive compensation limits this week, but the plan he’s expected to announce Wednesday seems to be a clear example that he’s trying to regain control of the news.
Obama is lobbying for quick passage of a nearly $900 billion fiscal stimulus plan, which is slowly getting picked apart by opponents in the Senate. And he’s coming off a tough Tuesday, when two of his choices for top posts--including the nominee for Health and Human Services secretary, Tom Daschle--withdrew from consideration over tax troubles.
His administration is only two weeks old, but for Obama, there’s no better time than the present to take a hard line against corporate largesse.