Congress’ executive pay dilemma

By Theo Francis

updated 12:52 p.m. ET Sept. 23, 2008

As Congress and the Bush Administration negotiate over the terms of a financial rescue bill, Democrats on Capitol Hill are drafting language designed to rein in executive compensation, in particular controversial severance packages at foundering companies.

For politicians concerned about the growing backlash on Main Street over what many see as a bailout of Wall Street fat cats, executive pay is a ripe target. After all, average total pay for a CEO at one of the 500 biggest companies last year was $12.8 million, double what it was a decade ago.

But compensation attorneys and experts say many of the restrictions could prove tough to enforce.

Executive pay was shaping up as one of a few remaining sticking points as Congress and the Republican Administration hurried to put a deal together amid further stock market declines. In several areas the players were nearing accord, with Administration officials reportedly accepting some congressional oversight and relief for homeowners struggling to pay their mortgages — key provisions for Democrats.

Legislative language circulating on Capitol Hill on Monday afternoon also included mechanisms that would give the government ownership stakes in companies benefiting from the bailout, to make up for losses the government might incur. Senate Democrats revived a provision that would allow judges to modify the terms of mortgages in bankruptcy proceedings, much as other debts can be adjusted. But the financial-services industry is strongly opposed to the provision and some predicted it would not garner sufficient support in the House.

Wall Street turmoil Bernanke, Paulson: Congress must act now First fear, then loathing, toward Wall Street Bush, Democrats differ on bailout’s passage Last U.S. investment banks to change status How Wall Street met its downfall U.S. offers 4 measures to restore order Vote: Is the government doing enough? Consumers, retailers cautious amid crisis Paulson: Rescue to cost ‘hundreds of billions’ Judge allows Barclays to buy Lehman units U.S. begins backing money-market funds Q&A: What does the crisis mean to you?

Treasury Secretary Henry Paulson appeared before the Senate Banking Committee on Tuesday with Federal Reserve Chairman Ben Bernanke and Christopher Cox, chairman of the Securities & Exchange Commission. Lawmakers have said they hope to craft a deal by the end of the week, when Congress is slated to adjourn.

Although executive-pay restrictions received considerable attention publicly and in negotiations on the Hill, the draft bills themselves included only short, vaguely worded sections that would require Treasury to limit pay and severance for executives at companies from which it buys troubled assets, while giving the agency wide discretion over the details. Treasury Secretary Paulson, acknowledging that "there have been excesses" in executive pay that should be addressed, has argued that the government's first priority should be stabilizing the financial markets, with compensation curbs and other reforms to come later.

A Senate discussion draft would require the government to ban incentive payments that the agency considers "inappropriate or excessive;" require executives to return incentives "based on earnings, gains, or other criteria that are later proven to be inaccurate;" and limit severance as "appropriate to the public interest" and the assistance the company receives.

Language in a draft House bill was similar, applying the restrictions for two years following Treasury assistance. But it also imposed additional restrictions on at least some companies, banning severance pay for top executives and requiring the companies to make it easier for substantial shareholders to nominate and elect board members and for shareholders generally to hold advisory votes on executive compensation.

Capitol Hill staffers acknowledged that the measures were worded broadly and said lawmakers want to give Treasury authority it can actually use. "The goal is something that sends a clear message of intention but is not necessarily binding" on Treasury, one senior congressional aide said.

A variety of obstacles face the Treasury if it ultimately sets out trying to enforce such provisions.

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