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September 25, 2008 4:42 PM

Bailout Plan Could Curtail Executive Compensation, Says Former Capitol Hill Lawyer

Posted by Brian Baxter

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The future of the proposed $700 billion economic bailout plan remains up in the air, but one aspect of the initial deal that troubled lawmakers was compensation for executives at companies selling securities to the federal government.

The Am Law Daily checked in with Venable legislative partner John O'Neill, a former tax and benefits counsel to the Senate Finance Committee, who says executives at companies participating in such a plan should read the fine print on any bill passed by Congress.

How does executive compensation tie into the plan Congress is considering?
When Treasury released the initial proposal, there was no mention of executive compensation in this very brief three or four-page bill. But when the proposal got to Congress, one of the first things they focused on was a concern and maybe outrage that several hundred billion dollars in taxpayer money could [end up in someone's golden parachute]. There was no indication that there could still be high salaries paid to executives at companies that potentially would receive some of this bailout money....Its become clear that if this proposal has any chance of [getting passed], there's going to have to be some kind of limitations put on executive compensation for those companies that participate in the program.

What are some of the compensation provisions being debated for inclusion in the proposed bill?
It doesn't seem that being eligible is enough to trigger the requirements or restrictions; but if you take money, then there would be restrictions put into place. The Senate Finance Committee put out some materials [Thursday] that are very vague, and my understanding is that the House is doing the same. The two things in the [Senate] proposal were a limitation on the deductibility of compensation above $400,000. So if you compensated one of your employees more than $400,000 in a year and you participate in this plan, you wouldn't be able to deduct those payments. There's a provision in law today that applies to every company in America, which says you can't deduct compensation above $1 million. That was put in back in 1993 [as part of President Clinton's budget bill].

But there're a lot of exceptions to that rule. For example, anything that's considered performance-based compensation--like stock options or other incentive-based pay--doesn't count towards the $1 million cap. So one of the open questions that no one knows the answer to right now, is when they talk about this $400,000 cap: Is that cash compensation like the way the $1 million rule works? Or would even performance-based compensation be included in the cap?

I take it those caps have been controversial.
There's been a lot of controversy around that $1 million cap...especially in academic circles. A lot of folks have criticized the rule, especially with the performance-based exception in there, by saying that it drove a lot of companies to develop exotic stock options and push their senior executives into performance-based compensation. Generally that's a good thing, because we all want shareholder and management interests aligned--that's the whole idea behind stock options and stock-based compensation--but people have some concerns that it went so far that it got management focused narrowly on short-term compensation and performance.

What else is Congress looking at from an executive compensation perspective?
They've proposed to significantly restrict golden parachute-type payments, and there's also some talk in the House of imposing something that's called a 'clawback requirement.' It was included in Sarbanes-Oxley after Enron for executives who were found guilty of financial misstatements and other accounting irregularities. That gave the authority to go back and basically reclaim money from executives who engaged in that behavior. There could be some provisions in [the proposed economic rescue package] that if there was misconduct or things of that nature by any of the executives during the leading up to the crisis, that there would be the potential to go in and 'clawback' that money.

Do you think there will be pushback if that's the case?
Secretary Paulson has said that his concern is that if you make all of this thing too restrictive, it will make companies not want to come into the program. Of course many folks in Congress have said, "If your company is going down the tubes and your company needs this program, you'll probably come in anyway." That's pretty hard to refute. But I think what Secretary Paulson's talking about are companies at the margins, where it might be beneficial to have them come in. Having said that, he's had a hard time persuading people, for obvious reasons. I think folks out in the country are angry about the bailout in general, and part of the political price is that they're going to have to do something [regarding executive pay] on this.

That certainly seems quite prescient today.
Right, you kind of see that at work here where you have a lot of people who made a lot of money over the last few years. But over the long-term the shareholders are getting wiped out or otherwise decimated and the executives [themselves] are gone. That's not to say that aligning interests in the short-term isn't a good thing also, but you want the short-, intermediate-, and long-term as well, ideally. You're never going to have that [balanced] perfectly, but that's one of the areas of debate about these rules.

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