The draft of the government's controversial $700 billion financial rescue plan released Sunday makes it clear that CEOs of firms seeking the bailout are about to have their pay packages capped.
The proposal seeks to rein in compensation at participating companies by limiting their tax deduction on executive salaries exceeding $500,000. It allows officials to recover bonuses that have been paid out based on financial statements that later prove to be inaccurate. And it bans exit-pay packages, or golden parachutes, at those companies.
The provisions may be some of the easier for politicians to agree on. They already appear to have support from some CEOs and taxpayers. A recent USA TODAY/Gallup survey of 1,019 people found that 63% think setting limits on executive compensation at companies that participate in the bailout is very important.
Golden parachutes typically pay ousted CEOs three times annual pay, bonuses and pensions and often include perks lasting well into retirement. They've long been a sore point for investors at underperforming companies, where many exiting executives have shared little of their pain.
Parachutes have been particularly gilded at the same financial firms that are now struggling. Merrill Lynch CEO Stanley O'Neal left in 2007 with an exit package valued at $161 million. Washington Mutual CEO Kerry Killinger's golden parachute is valued at $44 million, while Citigroup CEO Charles Prince left last year with $105 million in compensation, says compensation consultant James Reda.
It's highly unlikely that lawmakers will try to extend curbs on financial CEO compensation to other industries. "Congress should nudge the free market, not bludgeon it," Reda says.
Current regulations and industry guidelines on executive pay are complex and don't need meddling from Congress, says Frank Glassner, CEO of Compensation Design Group, a pay consultant. Moreover, the last time Congress tried to limit executive pay, it resulted in 1993 tax-code changes that capped corporate deductions for executive salaries over $1 million. But corporate boards found new ways to lavish executives with stock-based compensation and perks ranging from private use of corporate aircraft to financial advice and country club memberships. Coupled with rising stock prices, CEO pay packages soared.
Perhaps nowhere has excessive pay been more pervasive than at many of the financial firms now foundering. David DeBoskey, a San Diego State University professor, estimates Lehman Bros., American International Group, Fannie Mae and Freddie Mac — all reportedly under FBI investigation because of the mortgage crisis — paid their top executives a total of $1.4 billion in salaries, bonuses and stock-related pay from 2003 to 2007. Last year alone, top executives at Wall Street investment banks Goldman Sachs, Merrill Lynch, Morgan Stanley, Bear Stearns and Lehman received a combined $613 million, or an average of $123 million at each firm, says pay expert Graef Crystal, author of The Crystal Report on Executive Compensation.
"The enormous sums of money being paid to them is far above any other industry. It's obscene," Crystal says. "Wall Street is whacked out."
But the crisis has cast a spotlight on a wider universe of corporate compensation, particularly golden parachutes. (CEOs at Fannie Mae and Freddie Mac already were denied their golden parachutes, and when the government took over AIG, CEO Robert Willumstad voluntarily forfeited his $22 million exit package.)
"This may be the kind of wake-up call that boards need, because investor anger and regulatory action haven't woken them up," says Broc Romanek, a former Securities and Exchange Commission chief counsel and editor of CompensationStandards.com.
To some pay critics, many boards have long been asleep at the wheel. "We have been calling attention to out-of-control CEO pay for the last dozen years," says Mike Lapham, project director of the Responsible Wealth project at United for a Fair Economy, which favors paying CEOs no more than 25 times what their lowest-paid worker receives.
Lapham's efforts have gotten little traction. Criticism over executive pay has often fallen on deaf ears during bull markets that enrich investors. Even now, it's hard to prove that excessive CEO pay has had much to do with the underlying problem.
Yet the current financial meltdown has made placing curbs on executive compensation more acceptable even among current and former CEOs.
CNX Gas CEO Nicholas Deluliis notes that government intervention into financial markets is generally bad for taxpayers and financial markets and that capping executive compensation is inconsistent with capitalism. "However, if direct government intervention into the markets is a reality, then the taxpayer takes the place of the shareholder. That means that as taxpayers we should have the power to structure or limit compensation for executives any way we see fit," Deluliis says.
Jay Sidhu, former CEO of Sovereign Bank and now head of private-equity firm Sidhu Holdings, backs pay for performance, but "that means when performance is poor, CEOs should be held accountable and must lose perks and compensation.
"Unfortunately, some boards have not done their job, and Congress has to step in," Sidhu says. "Rubber-stamp boards must end."
Some already have. In May, insurer Aflac became the first U.S. company to let shareholders vote on the compensation of CEO Dan Amos. Of those casting votes, 92% approved Amos' $12 million package. But it was largely symbolic, because the vote was non-binding.
David D'Alessandro, CEO of John Hancock Financial Services from 2001 to 2004, says limiting pay, or even ending golden parachutes, isn't as key as time. CEOs should not get big paydays when they leave but should wait for five years so that shareholders can assess if any of their decisions resulted in long-term damage, he says.
Departed financial chieftains at some of the firms caught in the mortgage meltdown didn't have to wait for golden parachutes to collect eye-bulging compensation, says Equilar, a compensation-consulting firm. According to senior analyst Andrew Gordon and research manager Alexander Cwirko-Godycki, total 2005-2007 pay for executives heading troubled financial firms:
• Angelo Mozilo, former CEO of ailing mortgage lender Countrywide Financial, made $362 million in salary, bonuses, stock-option gains and perks ranging from country club fees to personal use of corporate aircraft.
• AIG CEO Martin Sullivan received $25.4 million, including $322,000 for private use of corporate aircraft, $153,000 for car and parking, $160,000 for home security and $41,000 for financial planning.
• Former Lehman CEO Richard Fuld got $187 million.
• O'Neal of Merrill Lynch received $66 million, including $357,000 for car services and personal use of aircraft in 2007.
• Prince of Citigroup made $42 million, including $180,000 for corporate aircraft, ground transportation and security services.
• Goldman Sachs CEO Lloyd Blankfein made $76.2 million, including $233,000 for car and driver services and $61,000 for financial and benefits counseling services.
Still, while its unclear how much — if any — impact the financial crisis will have on overall executive compensation, it's probable that the luster of golden parachutes will be dulled, experts say.
"There's a lot of room to downsize the exit pay for executives," says Reda. "They don't need that much money to find their next jobs, or to figure out what they want to do with their lives."