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

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.

Comments

[John Richardson]

Toothless indeed! The TARP provisions (Section 111) are meaningless, now more than ever. I don't believe that Congress and surely the President had any intention to impose meaningful restrictions on executive compensation. See: http://globalinvestmentwatch.com/2008/11/11/tax-fraud-is-not-tax-policy/ More troubling however, is the move to meaningfully restrict worker compensation in the auto industry - a real hypocrisy. See: http://globalinvestmentwatch.com/2008/12/14/demint-vitter-and-mcconnell-the-three-horsemen-of-the-hypocracy/ Perhaps it is time to unleash shareholders who, until now, could not use the Shareholder Proposal Rule as a way to address compensation issues. SET US FREE!!!

[John Thomas]

What regulations, and the agencies who are supposedly charged with policing them, aren't toothless?

Just read an article about the SEC and how its reputation is basically in shambles. Part of the reason is due to budget cuts that have been costly to the SEC's ability to actually enforce regulations and carry out punishments:

http://www.corporatecomplianceinsights.com/2008/reputation-of-sec-in-shambles

The article also talks about a survey of compliance professionals who say they expect fraud activity to increase in 2009.

What gives?

We entrust the government to protect little guys like me from corporations running roughshod. Yet, time and again, we see greed occuring and the people perpetrating the greed basically getting of scott-free. It seems like there has to be some cosmic confluence of events for anyone to actually be taken down or punished when they commit an egregious act.

The executive compensation provisions are TARP are no exception. The idea is good in theory, but there has to be enforcement strength behind them. I feel like a lot of these regulations are provisions are written to grab headlines and have rhetorical power, but in practice they prove to be inneffective. Maybe the new administration can help reverse this trend.

Sorry for ranting, and thanks for giving me the space to do so. This just really grinds my gears. I saw that Obama named Shapiro chairman of the SEC. She has lots of experience, so maybe she can add some teeth to that toothless organization. And hopefully the TARP regulations can prove to be a launching point for a broader and more effective set of provisions in the future. I know that a lot of working class people like myself are hoping so, because I'm sick and tired of these executives getting rich while their companies go under and the hard working people at the bottom suffer.