WASHINGTON — President Barack Obama ordered steep curbs on pay and perks Wednesday for bank executives seeking future taxpayer bailouts, capping their annual compensation at $500,000.
The new rules come with a big loophole, however: The compensation limits can be waived in most cases if shareholders think the executives should earn more. Citigroup and Bank of America are excluded from this benefit.
Obama's proposal comes after a flurry of reports that after taking taxpayer rescue funds, some big banks were still planning to purchase corporate jets, planned executive junkets to Las Vegas and Monte Carlo, or had spent millions of dollars on office renovations.
"This is America. We don't disparage wealth. We don't begrudge anybody for achieving success. And we believe that success should be rewarded," Obama said. "But what gets people upset — and rightfully so — are executives being rewarded for failure — especially when those rewards are subsidized by U.S. taxpayers."
The growing anger at bank executives for their role in creating a global economic crisis has eroded public confidence in Obama's efforts to pass an economic stimulus plan and to change course on previous bank-rescue efforts.
Obama defended both approaches anew on Wednesday, saying the public voted "resoundingly for change" in November and urging Congress "to act without delay."
As for his restrictions on bankers' compensation, Obama said that, "In order to restore our financial system, we've got to restore trust."
"For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste — it's a bad strategy — and I will not tolerate it as president," Obama said. "We're going to be demanding some restraint in exchange for federal aid — so that when firms seek new federal dollars, we won't find them up to the same old tricks."
Under the new plan, companies that seek new money from the Troubled Asset Relief Program or under a bank-specific negotiated agreement called "exceptional assistance" would face the following restrictions:
_ Top executives will have their pay and compensation capped at $500,000, a fraction of current pay for most.
_ Additional compensation will be limited to issuance of restricted stock in their banks, meaning that the government bailout money will have to be repaid before the executives can collect any of this extra non-salary compensation.
_ Restrictions on golden parachutes, the rewards given to departing executives, are tightened. For "exceptional assistance" recipients, restrictions will apply to the top 10 executives in a company, instead of the current top five. For TARP recipients, departing executives won't get more than a year's compensation.
_ Banks or other borrowers from the government will have to publicly disclose their policies on corporate jets, office renovations and executive entertainment in the form of parties, morale-boosting trips, retreats and the like.
As important as what Obama spelled out was the signal he sent that his administration would look at executive compensation beyond banks and Wall Street.
The president promised a look at a corporate culture that's rewarded top executives handsomely, while the income of workers, including those who are college graduates, has been largely stagnant for years.
"We're going to examine the ways in which the means and manner of executive compensation have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system," he said. "We're going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks."
The question of corporate governance already is on the agenda of Democrats, who favor "say on pay" legislation that would cap executive compensation at some level, say $5 million. Any executive compensation above the cap would have to be approved by shareholders.
On the face of it, this sounds like a populist measure to give small investors a say. However, institutional investors — mutual fund companies, pension fund managers and investors for endowments — often own large portions of a company's stock, and they'd have more say on what executives should earn.
Obama's efforts are likely to empower consulting companies that currently weigh investment risks, including corporate governance issues such as executive pay, on behalf of institutional investors, said Jack Coffee, a law professor and expert on corporate governance at Columbia University in New York.
The Obama administration's push to let shareholders decide is likely to boost shareholder activism, Coffee suggested, but he predicted that executives in time would return to a higher pay structure.
"Right now, I doubt they will seek $20 million and 1 million shares tomorrow," he said, noting that eventually shareholders will take the advice of consulting firms and come upon an industry standard for performance-based pay. "I'm not sure that (bank) CEOs are always going to be paid less than 7-foot NBA centers."
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Surely this isn't what Obama meant when he vowed change