Saturday, October 4, 2008

Executive compensation (Sec 111)

So Congress can claim that limits have been place on executive pay so that the leaders who caused this mess can't get massive paychecks and bonuses. This appears to be Section 111 of the MOAB (see below). However, reading this section, it doesn't seem all that onerous. It covers two different sets of situations - where the Treasury does "direct purchases", and where the Treasury does "auction purchases."

In the first possibility (i.e. direct purchases) there will be conditions only if the Treasury a) buys "directly" without an auction, etc., and b) also takes a "meaningful equity or debt position" in the company. So, if the Treasury buys toxic waste and does not also take an equity position, no conditions on pay. If all three conditions are met then there are "restrictions" - the institution has to follow appropriate standards (again undefined! And, actually, it looks like the company is only prohibited from offering the executives incentives to take unnecessary risk! This blogger believes we can assume that every company would deny ever having done this!) for executive compensation, but only as long as the equity position is maintained; executive bonuses could be "recovered" if based on false information; and, lastly, golden parachutes (undefined!) are not allowed while Treasury has an equity position.

In the second possibility (i.e. auction purchases) restrictions only enter into effect IF the purchases exceed $300 million. The "restrictions" here are only on new contracts, and only prohibit the payment of golden parachutes (undefined) IF the company goes bankrupt or insolvent or IF the executive is terminated....

Bottom line, this is very lose - with undefined terms and hedged with exceptions and 'outs.' Enough for senators and representatives to tell their constituents that they have acted on this matter, too little for any meaningful effect...

Note: This blogger does not believe that any current contract should be abrogated. He is also skeptical of this entire proposition. Thus he is not upset by the looseness of the rules, just extremely disgusted at mendacious senators and representatives!


(a) APPLICABILITY.—Any financial institution that sells troubled assets to the Secretary under this Act shall be subject to the executive compensation requirements of subsections (b) and (c) and the provisions under the Internal Revenue Code of 1986, as provided under the amendment by section 302, as applicable.
(1) IN GENERAL.—Where the Secretary determines that the purposes of this Act are best met through direct purchases of troubled assets from an individual financial institution where no bidding process or market prices are available, and the Secretary receives a meaningful equity or debt position in the financial institution as a result of the transaction, the Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance. The standards required under this subsection shall be effective for the duration of the period that the Secretary holds an equity or debt position in the financial institution.
(2) CRITERIA.—The standards required under this subsection shall include—
(A) limits on compensation that exclude incentives for senior executive officers of a financial institution to take unnecessary and excessive risks that threaten the value of the financial institution during the period that the Secretary holds an equity or debt position in the financial institution;
(B) a provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; and.
(C) a prohibition on the financial institution making any golden parachute payment to its senior executive officer during the period that the Secretary holds an equity or debt position in the financial institution.
(3) DEFINITION.—For purposes of this section, the term ‘‘senior executive officer’’ means an individual who is one of the top 5 highly paid executives of a public company, whose compensation is required to be disclosed pursuant to the Securities Exchange Act of 1934, and any regulations issued thereunder, and non-public company counterparts.
(c) AUCTION PURCHASES.—Where the Secretary determines that the purposes of this Act are best met through auction purchases of troubled assets, and only where such purchases per financial institution in the aggregate exceed $300,000,000 (including direct purchases), the Secretary shall prohibit, for such financial institution, any new employment contract with a senior executive officer that provides a golden parachute in the event of an involuntary termination, bankruptcy filing, insolvency, or receivership.
The Secretary shall issue guidance to carry out this paragraph not later than 2 months after the date of enactment of this Act, and such guidance shall be effective upon issuance.
(d) SUNSET.—The provisions of subsection (c) shall apply only to arrangements entered into during the period during which the authorities under section 101(a) are in effect, as determined under section 120.