Exec pay limits will spark search for loopholes

John W. Schoen Senior producer • Profile • E-mail

The government is expected Monday to announce new terms for the ill-fated $700 billion financial bailout package, including pay limits on top executives at banks that take taxpayer money. Based on past efforts to rein in executive pay, the search for loopholes will begin before the ink on the new rules is dry.

If the government requires a $500,000 cap on executive pay for companies that are receiving a federal bailout, do you think that will include their bonus as well? It seems that in many situations that the bonus is more than their base pay.
— Tom, Cincinnati, Ohio

That’s just one of many loopholes that will likely doom the government’s efforts to cap executive compensation — a mission Congress has been trying to accomplish for nearly two decades.

Let’s start with the question of who, exactly, is going to be subject to those limits. Bankers who have already taken government bailout funds before the restrictions went into place won’t be covered.

The salary caps also apply only to “top executives” which refers to your place on the organizational chart, not the size of your paycheck. It’s not uncommon for the biggest, multi-million-dollar payouts to go to traders or investment managers who generate substantial profits that work on lower rungs of the corporate ladder. (Some compensation experts suggest top executives subject to the limits could ask for a different title that takes they out of the reach of pay restrictions.)

It’s not the first time Congress has tried to narrow the gap between the highest- and lowest-paid workers in corporate America. As executive pay packages began to soar in the early 1990, Congress passed a law in 1993 that limited a corporation’s tax deduction for executive pay to “only” $1 million.

To get around the limit, companies began sweetening top executives paychecks with stock options — which let you wait to buy company stock until after you’re sure it’s gone up. But you get to buy the shares at the price they traded on the day you got the option, making it a no-lose bet.

That brought on a stock options scandal in which companies would “backdate” the official record of when the stock option was granted. Now, you didn’t even have to wait for the stock to go up. The company just picked a past date when the stock prices was low and let you buy now-higher-priced shares for an instant profit.

There are plenty of other “workarounds” to pay limits, including a variety of forms of “deferred” compensation. One simple way is to beef up a pension so future payments don’t count as current compensation. To get around restriction on current pay, some companies “gross up” key executive salaries, essentially having the company pick the tab for paying their income taxes.

There’s a cottage industry out there of “compensation consultants” who are themselves paid very well to come up with these arrangements. No matter what limits Congress comes up with, it’s a pretty good bet these experts will find a way around them.

Just like the old saying: If you build a ten-foot wall, someone will always come along with an 11-foot ladder.

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