Corporate Governance

The Bailout and Executive Compensation: Further Evicence of the Toothlessness of Toothless Restrictions

By J. Robert Brown

The Washington Post points out the toothless nature of the executive compensation provisions in TARP.  The requirements (clawbacks, limits on golden parachutes, restrictions on compensation that encouraged excessive risk taking) apply to companies that received bailout funds through the purchase of troubled assets.  Now that Treasury isn't buying troubled assets (it is injecting capital directly into sound banks through the purchase of preferred stock), the provisions are inapplicable.

This isn't to say the provisions are irrelevant.  Treasury has indicated that the restrictions apply to those accepting capital.  The problem is enforcement, particularly with the provision that limits the deductibility of executive compensation to the top five officers.  This provision falls to the IRS to enforce but it has no real enforcement authority.  As the article points out:

• Under pressure from Congress, the Treasury issued regulations in October on executive compensation and applied the tax-deduction limits to all companies receiving bailout funds, although the legislation did not require it for firms that received direct capital injections. But the Treasury failed to issue guidelines requiring the IRS or any other agency to enforce the rules, and it also failed to explain how the restrictions would be enforced.

The enforcement of the $500,000 limit is a concern but it is really the least of the problems surrounding the executive compensation provisions in TARP.  First, they are vague and weak.  Second, they do not really address the fundamental problem of executive compensation by altering the method used by boards (and approved by Delaware courts) in determining the amount.  As such, they don't regulate in any meaningful way the amount paid.  Finally, there is little reason to think that Treasury has the stomach to enforce the provisions that do exist and can be enforced.  We'll see whether this will change once Paulson exists. 

In truth, this is the first real effort by Congress to preempt some aspect of the executive compensation process (a reflection of dissatisfaction with the Delaware method of computing compensation).  The efforts will increase and over time will become more effective.

Full post as published by The Race to the Bottom on December 22, 2008 (boomark / email).