Geithner May Have Little Leeway on Executive Compensation Rules

By Matthew Benjamin

Feb. 20 (Bloomberg) -- Treasury Secretary Timothy Geithner and his staff will have little leeway to dilute the executive pay rules enacted by Congress for banks getting U.S. government aid, according to legislative and compensation analysts.

“We are going to have to learn to live with these rules, and it’s not going to be pretty,” said Max Schwartz, a compensation and benefits specialist in the New York office of law firm Sullivan & Cromwell LLP.

Treasury officials are examining how to implement the restrictions after the Obama administration sought unsuccessfully to exclude them from the $787 billion stimulus package signed into law this week. With little scope to alter the pay caps, Wall Street will have to accept the limits as written, analysts said.

The new rules force the top five executives at banks receiving at least $500 million from the Troubled Asset Relief Program -- such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. -- and the 20 most highly paid employees at those firms, to forgo cash bonuses. Incentive pay will be limited to stock that is restricted until bailout funds are repaid. The language went beyond guidelines the Treasury previously issued for future recipients of “exceptional” aid.

“What’s in the act is a baseline for what Treasury has to work with, and they can’t do something that’s contrary to what the act says,” said Laura Thatcher, head of law firm Alston & Bird’s executive compensation practice in Atlanta.

Corporate Jets

Limits apply to fewer executives at banks that received smaller amounts of government money. There will also be a ban on golden-parachute severance payments, new restrictions on perks like company airplanes and mandatory shareholder votes on executive pay.

The legislation requires the Treasury to review bonuses already paid out to senior executives at banks since they accepted taxpayer funds and negotiate reimbursements if officials determine the pay was “inconsistent with the purposes” of the stabilization plan.

Such language is vague, giving the Treasury some narrow latitude for interpretation, compensation experts said.

“Usually they won’t stray from the rules that are laid out by Congress,” said David Della Rocca, who focuses on benefits and compensation at law firm Latham & Watkins in Washington. “Where they can they’ll dilute them but some of them are pretty specific.”

Hedge Funds

It’s unclear whether the rules will apply to Public- Private Investment Fund, the Treasury’s effort to remove the toxic assets clogging banks’ balance sheets. The fund would offer government financing to help induce private investors such as hedge funds to purchase illiquid securities.

The administration doesn’t intend to go back to Congress to seek changes.

“We will work with Congress to ensure that what the president proposed, and what is now law, works to share the goal of ensuring that pay isn’t excessive for CEOs,” White House Press secretary Robert Gibbs said on Feb. 17.

Treasury spokesman Isaac Baker said yesterday in an e- mailed response to questions that “we will work closely with Congress to implement the American Recovery and Reinvestment Act in the coming weeks.”

Senator Christopher Dodd, a Connecticut Democrat who chairs the Senate Banking Committee, inserted the new rules into the stimulus bill signed by President Barack Obama this week. He said in a Feb. 14 statement that “some very high earners will have to adjust compensation expectations and maintain a different sense of proportion than in the past.”

‘Sever the Link’

Schwartz warned that the restrictions may “sever the link between pay and performance” for Wall Street executives, and could force an exodus “of the people who are most capable of turning the situation around.”

Citigroup Inc., JPMorgan and Wells Fargo & Co. each received $25 billion from TARP, the biggest beneficiaries of the program that injected $195.6 billion in more than 330 U.S. banks as of Feb. 10, according to the Treasury. Freeport State Bank of Harper, Kansas, received $301,000 from TARP, the smallest amount approved by the Treasury.

A political outcry erupted after figures showed Wall Street banks doled out $18.4 billion in bonuses last year, the sixth-biggest haul in history, even amid the government’s financial bailout.

Merrill Lynch & Co. awarded $3.6 billion in bonuses just before the firm’s Jan. 1 sale to Bank of America Corp. The top four recipients split $121 million, or an average of about $30 million.

“There’s a political climate here to support tarring and feathering, said Nell Minow, an expert on corporate governance who founded and edits the Corporate Library. Officials may describe any changes in rules as a strengthening of the restrictions, Minow said.

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net