Obama’s $500,000 Cap Feels Great,
Does Nothing: Graef Crystal
Commentary by Graef Crystal
Feb. 9 (Bloomberg) -- I’m in a
time warp. I keep hearing Howard Beale from the movie “Network”
screaming, “I’m mad as hell, and I’m not going to take it any
more.” Yet when I open my eyes, I find myself looking not at Beale
but at President
Our new president has worked
himself into a lather over the way senior executives have been
paid at major financial institutions, particularly those that have
received gargantuan government assistance.
Last week the Obama
administration issued new regulations designed to curb executive
pay while at the same time avoiding unnecessarily risky
Bottom line: The new rules do
The regulations distinguish
between gargantuan borrowers such as
American International Group Inc.,
Bank of America Corp. and
Citigroup Inc. and lesser debtors.
Senior executives at the big
institutions (probably the top five who appear on proxy
statements) can’t receive annual compensation (probably salary and
bonus) of more than $500,000 a year.
By itself, that’s tough. So tough
that my first impulse was to figure out a way to short the New
York City real estate market -- and the Hamptons while I was at
“But wait,” as the gadget hawkers
say on TV commercials. Those senior executives can receive as much
restricted stock -- free shares -- as their boards want to give
This is akin to admonishing a
teenager that he has to lose weight and therefore can no longer
buy Big Macs and fries, only to turn a blind eye as he consumes
endless amounts of pizza and donuts.
So I may have to limit your cash
pay at $500,000, but I can give you $100 million of free shares.
“But wait.” Those free shares
come with a catch. The government has to be paid back before they
vest, something that may not occur for years or may never occur.
“But wait.” There’s an escape
clause buried in the new regulation. The shares can be allowed to
vest “after a specified period according to conditions that
consider among other factors the degree a company has satisfied
repayment obligations, protected taxpayer interests or met lending
and stability standards.” Whatever that means.
Then we have an “earmark” in the
regulations, one sponsored by some in the corporate-governance
priesthood. It’s a requirement that a company allow shareholders a
“say on pay.” The priesthood figures that if shareholders can
express their opinion on the subject, boards will pay attention.
But these resolutions are
non-binding. Lawyers call this arrangement “precatory,” after the
Latin word for prayer. You can pray to the Lord, but He might not
hear you. In this case, you can pray to your board, and if past
behavior is any guide, it definitely won’t hear you.
Then, for companies receiving
financial assistance from the government, other than the really
big borrowers, there is no limit of $500,000 in cash and, indeed,
no limits at all, provided you disclose everything and the
shareholders get their say on pay.
The government has also weighed
in on perks. Here’s a further proof of the old maxim: “The
generals are always fighting the last war.”
Perks -- like flying your wife
and children with you on corporate jets as well as elaborate
security services, no doubt designed to protect you from your
shareholders -- have been much in the news of late. First, we had
the Detroit auto chiefs winging their way to Washington on
corporate jets, where they changed into their poverty costumes and
marched into a congressional hearing room waving signs that read
“Will work for food.” More recently, we have news of Citigroup
Inc. about to take delivery of an expensive jet.
And then there’s
Sandy Weill, the retired head of Citigroup traveling with his
family on a luxury company jet, outfitted with pillows made from
Maureen Dowd of the New York Times unearthed that one.
So the generals are all over
perks, which, at bottom, are small potatoes in the context of the
overall senior executive pay package.
“But wait.” You can still give
all the perks you want so long as you disclose your perk policy to
shareholders and give them a say on pay.
Boom for Lawyers
The government wants companies to
avoid really risky incentives, which is why stock options have
been taken off the kosher-food pay menu. But who do you think is
going to be attracted to a pay package that limits cash
compensation to $500,000 and then offers dazzling numbers of
restricted shares that will make one rich, but may also never pay
off at all? A risk-taker is who.
There is one good thing about all
these regulations. Even before Obama has been given an economic
stimulus bill to sign, he has found a creative way to create more
jobs -- jobs for lawyers, jobs for accountants and jobs for pay
I think the president is on to
something. The entire U.S. economy may be lifted out of recession
simply by creating more and more regulations of this type.
Crystal is a contributor to Bloomberg News. The opinions
expressed are his own.)
To contact the writer of this
Graef Crystal in Santa Rosa, CA at at
Last Updated: February 9, 2009