Financial Reform Watch

Executive Compensation Take Two - "Pay for Performance"

The House of Representatives approved yesterday, by a vote of 247 to 171, the “Pay for Performance” bill (H.R. 1664), which would prohibit TARP recipients from paying “unreasonable or excessive compensation” to its employees. The legislation tasks the Treasury Department with defining exactly what is “unreasonable or excessive.” The bill also repeals the controversial amendment in the American Recovery and Reinvestment Act that exempted bonuses based on employment contracts dated prior to February 11, 2009. While this is a far cry from the AIG-targeted bill the House passed earlier— imposing a 90 percent excise tax on AIG bonuses—H.R. 1664 is one more example of government treading into traditionally private sector turf.

The legislation applies to companies that have outstanding capital investments from the TARP or through the Housing and Economic Recovery Act, which covers Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition to prohibiting unreasonable or excessive compensation, affected companies could not pay bonuses or other supplemental payments not directly based on performance standards set by Treasury. The Treasury Secretary has the authority to exempt community investment institutions and institutions receiving less than $250 million from the TARP. The legislation also directs Treasury to establish a payback process for those institutions that would prefer to return the government’s money rather than be subject to the new compensation rules. For those institutions subject to the rules, the bill requires them to submit an annual report to Treasury with the number of employees whose compensation falls into each of these categories: over $500,000; over $1 million; over $2 million; over $3 million; and over $5 million.

In a letter to his colleagues last night, House Financial Services Committee Chairman Barney Frank (D-MA) sought to reassure members that H.R. 1664 would not “put American financial institutions at a competitive disadvantage internationally.”

Despite language in the bill that merely doing business with TARP recipients would not subject institutions to the compensation rules, questions still abound as to whether this legislation would open the door for executive compensation regulations dealing with companies "downstream" from the direct TARP-bank relationship. Would Treasury be able to regulate compensation of firms acquired by TARP recipients? How far down the chain from Fannie and Freddie would the restrictions go? These and other questions will be the topic of discussion in days to come.

The Senate is not nearly so far along on executive compensation legislation and there is no schedule for action there. Passions on this issue have cooled somewhat from their "torches and pitchforks" level of a few weeks ago, but we expect discussions on Capitol Hill to continue and even if legislation is not enacted in final form, the debate will create pressures on the Administration to take some steps in this area.

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