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Bailout Bill Executive Compensation Provision: Lipstick on a Pig

posted by Adam Levitin

The bailout bill as defeated in the House today was some 110 pages. But there was little that made it substantively different from the two and a half page bailout plan originally proposed by Secretary Paulson. So what was all that other stuff? Lots of window dressing. Lots and lots of it to pretend that there were serious conflicts of interest provisions or help for consumers or limits on executive compensation.

Let me just illustrate what a fraud the executive compensation limits proposed are. Currently, businesses may deduct all salaries under $1 million from their corporate income. The proposed bailout bill would lower that deduction to $500,000 for certain executives at certain companies. Already, not a real big penalty for excessive executive compensation--the tax deduction gets limited by $500K/executive. But here's the catch: the deduction cap only applies to the top 3 executives at companies that have over $300MM in dealings with the Treasury under the bailout program, excluding direct sales.

In other words, the bailout bill's cap on executive compensation only applies to 3 people at really big financial institutions that enter into guarantee arrangements with Treasury. At worst, this means that an addition $1.5MM is not deductible from some very large financial institutions corporate income. $1.5MM is a rounding error for big institutions. The lost deduction on the salaries between $500,000 and $1MM will just come out of shareholders' dividends which won't be changed by so much as a penny. And for smaller institutions, e.g., hedge funds...probably won't apply to them. Given that these institutions are reporting losses for the current year, this is pretty much a throw away anyhow. But for Congress to pretend that it did anything about executive compensation is laughable. I guess they were hoping that no one would look at the tax provisions (rather than the executive compensation provisions) that were buried on page 101 of a 110 page bill.

And the golden parachute limitations? First, it only applies to the top 5 executives, not others. Second, there are already strict limits on executive compensation for troubled banks. The universe of people affected by the executive compensation provisions in the failed bailout proposal would have been very small indeed. (I would be surprised if there are other twists that make this ineffective: tax folks, what am I missing?)

And guess what the executive comp provisions don't cover? The big gedile...stock options. If you're an exec whose options are out of the money now, guess what, the board can issue you more (at no cost to the company really), and there's nothing in the bailout bill that will stop that.

So what did Congressional leadership do with this bailout bill? Put lipstick on a pig. I wonder how many Congressmen who voted for the bill know just how impotent the executive compensation, oversight, and homeowner protection provisions are. There's a reasonable bailout bill that could be passed. But this wasn't it.

Comments

The democrats have the power to craft a bill and pass it. Bush can then sign it, or veto it.

A democratic bill could put real limits on executive compensation, and provide real relief to homeowners by allowing them to, within limits, modify the mortgages on their primary residences in Chapter 13.

To be politically palatable, it would have to be closer to the bills originally floated by Dodd and Franks. Not the watered down bills that neither party was willing to support.

I'm pleased that someone else read this provision and came to the same conclusions that I did. This "crackdown" in executive compensation is pure smoke and mirrors. It would be harder to do this bailout if the average citizen had any undrstanding how, to be honest, phony this crackdown is. From my experience, this is the work of high powereed lobbyists, who helped "flesh out" the basic proposals in a way that emasculates a policy that sounds good.

Professor Levitin, you have probably put your finger on why this aspect of the bailout is not discussed or used to support the legislation.

Why not a real set of restrictions, say, a 75% tax on salaries, all salaries, above $1 million for executives of companies that accept some level government purchases or investment, until five years after the last purchase or investment. That would be an appropriate indirect taxpayer participation in the benefits of the bailout. It might also encourage a long term perspective on those who run such institutions.

Its good to see that someone agrees with my conclusions. excellent choice of words to explain my outrage..."lipstick on a pig".

Does the senate proposal add more protection to home owners / allow less compensation to the execs?

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