Cut executive pay? It'll cost you plenty

[February 14, 2009]  WASHINGTON (AP) -- Turns out there is a problem with limiting the pay of highly compensated bankers: the Wall Street high flyers pay taxes, too.

Imagine this: Capping top bank executives at $400,000 a year, as the Senate version of the $800-plus billion economic stimulus had called for, would have cost the government $11 billion in lost tax revenue by 2019. That's more than $1 billion a year, according to an estimate this week by the Congressional Budget Office.

Ouch.

Eager to lower the price of the stimulus package, congressional negotiators working on the final bill made the pay cap disappear.

But the legislation still imposes compensation restrictions on banks that receive money under a financial sector bailout program. And they are tougher than the ones that the Obama administration unveiled with much fanfare last week.

The administration's restrictions applied only to banks that receive "exceptional assistance" from the government. It set a $500,000 cap on pay for top executives and limited bonuses or additional compensation to restricted stock that could only be claimed after the firm had paid the government back.

The stimulus bill, however, sets executive bonus limits on all banks that receive infusions from the government's $700 billion financial rescue fund. The number of executives affected depends on the amount of government assistance they receive. But as a rule, top executives will be prohibited from getting bonuses or incentives except as restricted stock that vests only after bailout funds are repaid and that is no greater than one-third of the executive's annual compensation.

The prohibition would not apply to bonuses that are spelled out in an executive's contract signed before Feb. 11, 2009.

At banks that received $25 million or less, the bonus restriction would apply only to the highest paid executives. At banks that receive $500 million or more, all senior executives and at least 20 of the next most highly compensated employees would fall under the bonus limits.

Sen. Christopher Dodd of Connecticut, the Democratic chairman of the Senate banking committee and the author of the bonus limitations, said the restrictions are crucial, especially if the Obama administration asks Congress for more money to rescue the financial sector.

"It will never happen as long as the public perceives that there are people getting rich," he said in an interview. "Save their pay, or save capitalism."

But critics complained that the compromise did too little - or too much.

Sarah Anderson, an expert of executive compensation at the liberal Institute for Policy Studies, said eliminating the $400,000 pay cap because it reduced revenues "is not a winning argument with taxpayers." She argued that companies could find ways around the bonus restriction by increasing salaries or even changing job titles.

Irv Becker, a compensation authority at the Hay Group, a global management consulting firm, said bonuses and other incentives account for a major portion of the compensation of financial industry executives.

"The concern that we have is the unintended consequences," Becker said. "You're likely to be driving some of these talented executives out of the industry."

Dodd said that even though the salary cap had been removed from the final bill, he was still hearing objections from major financial institutions.

"I just find it incredible that people are calling up and bellowing about this," he said on the Senate floor. "We're in the deepest economic crisis in the lifetime of any living American, and they're worried about their pay."

[Associated Press; By JIM KUHNHENN]

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