Tuesday, February 3, 2009

WSJ NEWS ALERT: Obama to Announce New Executive-Pay Caps

President Barack Obama plans to unveil a series of new pay curbs Wednesday, including limits to executive salaries.

Among the new restrictions being considered is a cap on salaries for executives at companies that receive a substantial amount of government aid. Such a move would amount to an unprecedented effort to limit executive pay.

WASHINGTON -- President Barack Obama will unveil a series of pay curbs on Wednesday, including a strict new limit on executive salaries for companies that receive "exceptional assistance."

The rules represent the White House's attempt to ensure that financial institutions receiving government money are held accountable for spending it responsibly, an administration official said.

President Barack Obama, pictured at the White House Tuesday, plans to unveil a series of pay curbs Wednesday.

Under the new rules, companies that receive "exceptional assistance" from taxpayers may not pay any top executive more than $500,000 a year, an administration official said. Any additional compensation would have to be in restricted stock that will not vest until taxpayers have been repaid, the official said.

This goes beyond current rules, which bar such companies from taking a tax deduction for compensation above half a million dollars.

Moreover, all banks receiving help will face tougher restrictions, including new rules limiting "golden parachutes" and requirements that shareholders have a say on compensation for top executives, so-called "say on pay" policies. Specifically, senior executive compensation plans and rationale must be submitted to a non-binding shareholder resolution.

All banks will face tougher disclosure rules, which will affect spending on matter such as aviation services, office renovations, entertainment and holiday parties, conferences and events, and golden parachutes.

The rules are expected to be announced by Mr. Obama and Treasury Secretary Timothy Geithner at the White House.

It's not clear yet what counts as "exceptional assistance." People familiar with the matter have suggested it refers to a situation where the government invests heavily in an ailing company, as it did with American International Group Inc.

The new rules would not be applied retroactively to companies that have already received aid. Instead, companies that have already received help from Treasury will be required to demonstrate that they have complied with the existing rules and agree to strict monitoring and oversight.

Financial institutions participating in the Generally Available Capital Access Programs can waive the $500,000 limit but would have to disclose those plans and, if requested, submit to a non-binding "say on pay" shareholder resolution.

The administration official added that the president intends for these standards to mark the start of a long-term effort to institute a "sensible framework" for executive compensation that promotes sound risk management and long-term growth while preventing future financial crises.

Possible steps for the future include requiring compensation committees on all public financial institutions to review and disclose strategies for aligning compensation with sound risk-management.

Another possibility is requiring top executives to hold stock for several years after it is awarded to encourage a more long-term focus on the firm's economic interests.

The Treasury Department plans a conference on executive pay reform to discuss many of these ideas.

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