Despite Treasury's New Rule, Senators Aren't Giving Up Their Push to Cap CEO Pay

[ProSense]

Despite Treasury's New Rule, Senators Aren't Giving Up Their Push to Cap CEO Pay

By Elana Schor - February 4, 2009, 12:45PM

Here's an important point about President Obama's new restrictions on executive pay at companies receiving aid from the Treasury Department: they're not retroactive. A bank that has already received bailout money would not need to abide by the limits unless it accepts more cash in the future.

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But Sen. Claire McCaskill's (D-MO) executive-pay cap bill is retroactive, applying to companies that have received past as well as pending bailout infusions. And McCaskill just said she has no intention of giving up her push to attach her version of CEO pay caps to the economic stimulus bill. Here's her statement:

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McCaskill's office added that she would still push her CEO pay proposal "as a fallback assurance" that the new Treasury Department rules would be heeded. Sen. Bernie Sanders (I-VT), another leader on the executive-pay issue, also weighed in to call Obama's move "a good step forward, but we have to go further."

Will Democratic leaders allow a vote on McCaskill's bill during the stimulus debate? That remains to be seen.

Late Update: Sen. John Kerry (D-MA) joined the emerging chorus this afternoon with a letter to Treasury Secretary Geithner touting his proposal to limit the tax-deductibility of executive pay -- a separate issue, but equally relevant in terms of reining in bailed-out companies that are playing fast and loose with public funds.

Late Late Update: Sens. Olympia Snowe (R-ME) and Ron Wyden (D-OR) aren't giving up either; they just announced plans to offer an amendment forcing bailed-out companies to repay already distributed executive bonuses that exceed $100,000. The subtle message from Congress to the administration on these executive pay caps seems to be, "Good start -- but not enough for us."

Kerry Presses Secretary Geithner to Support Legislation Limiting Salaries for Executives

WASHINGTON, D.C. – Senator John Kerry (D – Mass.), a senior member of the Finance Committee, and author of the Compensation Fairness Act of 2008, today wrote to Treasury Secretary Tim Geithner, applauding the administration’s plan to limit executive compensation for companies receiving significant funding from the Trouble Asset Relief Program (TARP) and pressing for support his legislation to tighten the rules for the amount of compensation that is deductible as an ordinary and necessary business expense.

“I share your concerns about executive compensation and believe that if it is left unchecked it will continue to result in executives taking unnecessary risks and remaining focused on short-term profits rather than long-term sustainability,” wrote Sen. Kerry in today’s letter to the Treasury Secretary.

Full text of the letter is below:


Dear Secretary Geithner:

I’m encouraged by your announcement today limiting executive compensation for executives of corporations that are receiving substantial assistance from the Trouble Asset Relief Program (TARP). As you know during the negotiations on the Emergency Economic Stabilization Act of 2008, Republicans blocked our efforts to limit executive compensation. However, the Act included provisions to limit the amount of compensation that can be deducted. I believe that we must act now to send an even stronger signal and demonstrate that we demand responsibility -- taking it one step further and limiting the deductibility of compensation for all executives. I have introduced legislation on this issue and would like to ask for the Administration’s backing in getting it passed into law.

Last year, I introduced the Compensation Fairness Act of 2008 which tightens the rules for the amount of compensation that is deductible as an ordinary and necessary business expense. According to Equilar, a compensation research firm, the CEOs of the ten largest financial services firms in a survey of 200 companies with revenues of at least $6.5 billion were awarded a combined total of $320 million last year, even though the firms reported mortgage-related losses that totaled $55 billion and that wiped out more than $200 billion in shareholder value. That is unacceptable. It is not just the financial industry where executive pay has become excessive. For 2006, the CEOs of large U.S. companies averaged $10.8 million in total compensation, more than 364 times the pay of the average U.S. worker. We can learn from what led us to the current situation and one way to make CEOs more accountable is to limit the taxpayer subsidy for executive compensation.

Under current law, the allowable deduction for the compensation of the top five highly paid individuals, including the CEO and the chief financial officer (CFO) is limited to $1 million per year. This limitation does not include commissions and performance-based pay. I am concerned that these exceptions have weakened the effectiveness of the limitation and encourage performance-based pay arrangements which may lead executives to manipulate earnings.

The Compensation Fairness Act of 2008 would make several changes to the limitation on deduction for compensation. It would repeal the exceptions for commission and performance-based pay. Under current law, an employee that is covered by the limitation has to be employee the last day of the year. The legislation would change this to make a covered employee one who is employed at any time during the year. This legislation would retain the $1 million limitation and index it for inflation.

I am currently working on a revised version of this legislation which also limits the amount of nonqualified deferred compensation that can be deducted. I appreciate your interest in this issue and believe that we should look at executive compensation beyond TARP participants.

My legislation does not limit the amount of salary an executive can receive, but it would limit the tax subsidy. Taxpayers should not have to bear the cost of excessive compensation. Warren Buffett, one of the most successful businessmen of all time, has annual salary of $100,000.

I would appreciate if you would review my proposal and consider including it in the budget for fiscal year 2010. Enclosed is a copy of a draft of the legislation for your review. Thank you in advance for your consideration.

Sincerely,


John F. Kerry

cc: The Honorable Peter Orszag

[Still Sensible]

1. I suspect that any "retroactive" provision would

be a violation of the "ex post facto laws" covenant in the constitution. I am glad Obama did this, but I don't know that there is anything we can do since Bush didn't.

Now it's probably a whole different matter on any funds from the original $350 billion that are as yet not distributed.

[ProSense]

3. Whatever more they can do is good. n/t

[Kensan]

5. Maybe we'll get to if that suspicion is correct...

Seems like the Military Commissions Act and the FISA bill included retroactive immunity clauses. So if Congress can excuse possible crimes that happened in the past, maybe they can recover some of this public money used for executive compensation. So if the current compensation limit proposals get derailed due to "ex post facto", maybe someone will chime in about the craptastic legislation signed by Bush to cover up his illegal activities after 9/11.

For the record, I actually agree with your position that it doesn't seem to have legal merit. That was the tragedy of the original bailout legislation. Congress put specific wording about compensation limits, and Paulson was able to use those specifics to circumvent the caps. He used the money to buy equity positions in the banks, instead of buying the toxic assets. The caps only applied to banks receiving money for assets...neat trick. But then Congress should have made those provisions bulletproof, especially given how many members and their staffs are lawyers. You almost get the sense that they really didn't want to limit executive pay. Hmmm.

[w4rma]

2. Very good. (nt)

[Cha]

4. Rec'd~ There has got to

be some balance on corporate welfare and they won't do themselves.

[Clear Blue Sky]

6. Is this just for salary?

Many executives take small salaries and get loads of stock options and other goodies that may have more favorable tax treatment. If the cap is for salary alone, then it may not do that much good.