Will the bailout have any impact on executive pay?

The proposed $700 billion federal bailout of the financial services industry that the House and Senate passed and President Bush signed this week has shined a spotlight on executive pay.

Treasury Secretary Henry Paulson first proposed the bailout on Sept. 19. Ever since, Americans have expressed outrage over footing a bill for what they perceive as a financial crisis brought on by greedy executives who profited while leading their firms to ruin. Taxpayers' anger, along with pressure from Congressional leaders, forced Paulson to address compensation for executives at the firms being bailed out in his proposal. The Treasury Secretary initially resisted making executive pay restrictions a condition of the bailout.

The question is: Do the restrictions on executive pay that legislators added to the bailout bill, also known as the Emergency Economic Stabilization Act of 2008, go far enough? Or will executives find ways to capitalize on loopholes, as they did with limits on CEO pay that were written into bankruptcy laws in 2005?

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The proposed $700 billion federal bailout of the financial services industry that the House and Senate passed and President Bush signed this week has shined a spotlight on executive pay.

Treasury Secretary Henry Paulson first proposed the bailout on Sept. 19. Ever since, Americans have expressed outrage over footing a bill for what they perceive as a financial crisis brought on by greedy executives who profited while leading their firms to ruin. Taxpayers' anger, along with pressure from Congressional leaders, forced Paulson to address compensation for executives at the firms being bailed out in his proposal. The Treasury Secretary initially resisted making executive pay restrictions a condition of the bailout.

The question is: Do the restrictions on executive pay that legislators added to the bailout bill, also known as the Emergency Economic Stabilization Act of 2008, go far enough? Or will executives find ways to capitalize on loopholes, as they did with limits on CEO pay that were written into bankruptcy laws in 2005?

Sarah Anderson, director of the Global Economy Program at the think-tank Institute for Policy Studies, says the bailout's provisions on executive pay have both strengths and weaknesses. Anderson sees the restrictions on golden parachutes and caps legislators placed on corporate income tax deductions as positive steps. But she also believes the law gives too much power to Paulson, a former CEO of Goldman Sachs, to define excessive pay. The bottom line is that many executives may still walk away from this crisis with millions of dollars in their pockets.

CIO.com and the Institute for Policy Studies took a look at the bailout bill's fine print to see exactly what it says about executive compensation and to find out if it will have any real impact on executive pay at the firms being bailed out.

What the Bill Says

The Emergency Economic Stabilization Act of 2008 (H.R. 1424) states that limits on executive pay apply to the top five highest-paid executives at financial institutions that sell their "troubled assets" (e.g. bad loans and mortgage-backed securities) to the Treasury Secretary.

When the Treasury Secretary buys a financial institution's assets directly from the institution (as opposed to purchasing the assets through an auction), and the Secretary receives "a meaningful equity or debt position" in the company as a result of the sale, the company has to adhere to "appropriate" limits on executive compensation, according to the bill. But the bill doesn't define what a "meaningful" stake is for those firms that negotiate directly with the Secretary, nor does it specifically state what is an appropriate limit for executive compensation.

"It's up to the Secretary to decide what is meaningful," says the Institute for Policy Studies' Anderson. "We have heard that after the votes, when the bill is enacted, Congress might put in guidelines as to what this means, but they were under pressure to keep the bill as flexible as possible for the Treasury Secretary."