What the Latest Bailout Draft Means for Exec Pay

Last Updated Sep 29, 2008 2:20 PM EDT

coin_stacks.JPGThe latest draft of the $700 billion Wall Street bailout plan has serious implications for executive compensation.

The Emergency Economic Stabilization Act of 2008 takes direct aim at such popular executive perquisites as golden parachutes. It would employ "clawbacks" to grab back bonuses and other compensation from corporate officials who are involved with later earnings restatements for firms benefiting from the bailout.

Specifically, these are the newest crinkles for exec pay:

  • "Golden parachutes" for executives be denied to executives who leave ailing firms participating in the bailout.
  • No "golden parachutes" would be allowed incoming executives for firms in the program.
  • Outgoing executives who have severance packages more than three times their salaries would be forced to pay a 20 percent excise tax on the sum.
  • Any bonus or incentive compensation to any senior executive officer based on "statements of earnings, gains or other criteria" would have to be paid back if it were later showed that the statements were "materially inaccurate."
  • The draft bailout defines as "senior executive officer" any one of the top five executives whose compensation is required to be disclosed by federal securities laws.
The latest bailout draft, coming in at a whopping 110 pages, is a heavyweight compared to the skimpy, three page document Treasury Secretary Henry Paulson first proposed two weeks ago. Besides its executive compensation clauses, it would give out the money in three tranches, two requiring Congressional approval, and would require an oversight board to check progress.

The plan also would require the U.S. Securities & Exchange Commission to take another look at the "mark to market" methods of accounting that many experts believe helped lead to the crisis. If this controversial, Enron-style method of accounting is changed, the implications for all corporations will be big.

We'll know later today if the House of Representatives approves. The vote is expected to be tight given the plan's generally unpopularity and the latent stiff opposition from renegade far-right conservatives in Congress.

While the limits on pay apply only to firms benefiting from the bailout, they are certain to have legs as other legislation is considered in coming months that would apply to all firms. So, if you are a CEO proud of your golden parachute in your compensation contract, you might see it float away thanks to the likes of Lehman Brothers, Bear Stearns and AIG.

(Image by Darren Hester via Flickr, CC 2.0)