The proposed $700 billion bailout bill for the financial industry will intensify the scrutiny of highly paid executives — a long-running flashpoint between shareholders and companies.
Frank Glassner, CEO of the Compensation Design Group, says the financial meltdown is forcing lawmakers and businesses to more closely examine pay practices and "to ask whether it is fair, appropriate and under control."
A House of Representatives' proposal would limit pay incentives that encourage executives to take "inappropriate or excessive" risks. It would also prohibit firms aided by the government from paying severance to executives.
The bill also could include so-called clawbacks, allowing the government to recoup executives' pay if it is pegged to earnings or other measures that are "later proven to be false and inaccurate."
The Federal Housing Finance Agency has already said it won't pay millions of dollars in severance to former CEOs of Fannie Mae and Freddie Mac, which the government took over this month.
Wall Street executives rank among the highest-paid executives anywhere, with 50% of investment bank earnings going to their pay, according to Charles Elson, director of the University of Delaware's Weinberg Center for Corporate Governance.
But linking pay limits to bailout legislation will lead to more regulatory headaches and confusion about complex pay practices, he warns.
"The bill clouds the pay issue," Elson says. "It's like a guy with a coronary going to the emergency room, but getting his knee fixed."
Corporate boards, the Securities and Exchange Commission and shareholders' attorneys already can recover the pay of executives who engage in questionable or illegal behavior.
Last year, in the largest stock-option backdating corporate scandal, former UnitedHealth CEO William McGuire returned $600 million in cash and stock pay to UnitedHealth and shareholders.
Companies from Citigroup to GE also are steadily adopting clawback practices. According to the Corporate Library research firm, 295 of 2,121 companies surveyed earlier this year have adopted clawback policies — up from 14 companies in 2003.
If Congress decides to limit pay, Glassner says that executives should be paid "reasonable and competitive amounts" but without guarantees, to prevent excessive pay if a company or executive fails or falls short of financial criteria.
Given the unprecedented scope of the bailout plan and its impact on public dollars, Glassner says that executives' pay should be based on the money returned to taxpayers and the government.
"Since taxpayers are being asked to pick up the bill," he says, "pay should be linked to a metric that measures return to the taxpayers. Why not, in a case like this?"
Contributing: Thomas Ankner