Bailout Fallout: Watch For Declining CEO Pay Packages

(MoneyWatch)  Many CEO pay packages will now come under the microscope, courtesy of the proposed multi-billion economic bailout plan that will require limiting top executive pay-outs.

Passage of the rescue plan will provide more ammunition to shareholder activists and corporate governance interests fighting to contain, or roll back, giant compensation pacts for corporate CEOs and senior-level executives -- especially those in the financial services sector that's catching blame for many of the nation's economic troubles.

Under the proposed $700 billion rescue plan, salaries of CEOs whose companies receive federal aid will be capped. Congress is angry about the failed lending and business practices of investment houses that led to the controversial rescue plan. A lot of that ire is aimed at the eight-figure paydays for investment banking CEOs, who benefited from their firms' short-term stock and profit performances and not their overall fiscal health.
Among those who have enjoyed fat payouts are: Richard Fuld, chairman of bankrupt Lehman Brothers, who got $22 million in retirement pay; Angelo Mozilo, founder of ailing Countrywide Financial (now owned by Bank of America), who sold $121 million in company stock while reporting billions in losses; Stanley O'Neal, former head of Merrill Lynch, who left with a $161 million retirement deal (under pressure, Merrill sold to Bank of America).

The Bush Administration, which initially fought against having CEO compensation caps included in the bailout, has given in to public and congressional demands for limiting CEO pay.
The outcry for restricting CEO pay packages won't end with passage of an economic rescue plan, experts predict. In fact, it's expected to give a boost to shareholders and organized labor who seek to shine a spotlight on how CEO pay is determined and are pushing for methods that limit payouts when the top boss doesn't produce results.

For example, so-called "say on pay" efforts are gaining momentum, according to executive compensation experts. Basically, these are advisory votes by shareholders on top executive pay levels. In 2006, there were six such votes; last year, 51 votes took place. The largest company to voluntarily participate in a "say on pay" vote was Aflac, the supplemental-insurance provider. When the company's shareholders cast their votes, 93 percent approved the executive compensation packages.

More "say on pay" initiatives are expected this year.

In addition, institutional shareholders, including mutual funds and pension funds, are demanding that many executive pay contracts now have "claw back" provisions, which compels CEOs to give back a portion of their compensation if they mismanage the company or fail to achieve important goals.

Moreover, CEOs will likely find that the era of the lucrative short-term deal is drawing to a close. Increasingly, compensation will be paid out over a longer span, typically up to 10 years.

Skeptics note that exec compensation caps are hard to enforce and don't work.

And none of these measures are expected to defuse current outrage aimed at overpaid Wall Street CEOs and corporate executives. A recent survey found that 80 percent of Americans believe CEOs are overpaid -- and that poll was taken before the recent economic crisis.