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Wall Street Journal, September 26, 2008 article


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Curbs on Pay Advance in Bailout Plan

Fueled by outrage over big pay packages for executives of failed financial firms, Congress is moving toward including curbs on executive compensation in the $700 billion bailout package.

An agreement on principles of the bill hammered out by congressional leaders Thursday requires the Treasury "to set standards to prevent excessive or inappropriate executive compensation for participating companies."

It's less clear whether the measures would reduce CEO pay. Past efforts to regulate pay have sometimes had the perverse effect of increasing compensation, by setting ceilings that became floors, or legitimizing practices that had been rare.

[Leaving in Style]


The details of the latest bill remain in flux, but early versions focus on three approaches: limiting severance packages, or "golden parachutes;" giving shareholders an advisory vote on executive pay; and giving companies more authority to "claw back" bonuses later found to be based on incorrect financial results. All would apply only to companies that participate in the bailout.

Some executives agree on the need for changes. "If you go to the government for a bailout, you have got to expect more scrutiny and regulation, which includes compensation," says Daniel P. Amos, chief executive of Aflac Inc., an insurer that voluntarily offered shareholders an advisory vote on compensation this spring.

Skeptics warn that too many pay curbs could drive talented executives to other companies at a time when they're most needed to turn around struggling firms. "There's going to be a hedge fund or private-equity firm that will take" any qualified executive, says David Yoffie, a strategy professor at Harvard Business School who served on the board compensation committee at Charles Schwab Corp. until last year.

Here's a closer look at the possible measures:

Golden Parachutes

Big exit packages for poorly performing executives rankle investors and lawmakers. Robert Nardelli, for instance, walked away with $210 million from Home Depot Inc. after resigning as CEO last year.

Severance provisions are a common feature of executive-employment contracts. A 2007 study of 137 large companies by data-tracker Equilar Inc. found 71.5% of CEOs had severance agreements, valued at a median $21 million, including cash severance, equity grants and various benefits.

Some versions of the bailout bill would prohibit participating companies from paying severance for two years, or longer, if the government holds an equity stake.

Pay experts say the value of "golden parachutes" is slowly shrinking, as some boards trim packages and a handful of CEOs voluntarily cut their own payouts. Robert H. Bohannon, recently retired CEO of exhibition-services firm Viad Corp., last year asked to reduce his potential cash severance by as much as $5 million; his successor also agreed to a smaller package. "It just seemed like the right thing to do," he says.

The financial crisis is spurring more reductions. Regulators nixed millions of dollars in exit pay for the former CEOs of Fannie Mae and Freddie Mac after they seized the mortgage giants earlier this month. Robert Willumstad, former CEO of American International Group Inc., gave up his $22 million payout after the government took control of the insurer.

"Say on Pay"

"Say on pay" measures give investors an annual, nonbinding vote on the compensation of top executives. Such advisory votes are already required in the U.K., where their effectiveness is in question. Some pay trackers say the provision hasn't stopped executive compensation in the U.K. from rising.

Congress had been considering imposing a similar requirement in the U.S. A measure passed the House last year, but had not come up for a Senate vote. Presidential contender Barack Obama proposed the Senate bill. His opponent, John McCain, supports the concept of "say on pay," but not the legislation.

Activist investors have been pressing for the votes on a company-by-company basis. They submitted proposals at 97 companies this year; of the 70 where results are known, 10 received support from a majority of votes cast, compared with eight in 2007 and none the year before, according to RiskMetrics Group Inc.

Proponents believe the advisory vote would pressure boards to better tie awards to performance. But skeptics fear investors will end up voting on pay packages they don't fully understand, and that boards will adopt common pay practices rather than tailoring compensation to suit companies' needs.


The movement to retrieve unearned pay was sparked in the early 2000s by outrage over multimillion-dollar awards to executives at companies such as Enron Corp. that were later found to have fraudulently boosted their results.

The 2002 Sarbanes-Oxley law included a claw-back provision, but it is difficult to apply and little used. Lawsuits are costly and hard to win and employment contracts typically protect executives' earnings.

Recently, companies have tried a different approach: inserting claw-back provisions in executive-pay agreements. More than half of Fortune 100 companies had such provisions in place in 2007, according to data-tracker Equilar Inc. That's up from 42% in 2006 and 18% in 2005.

Most of those provisions give the board the right to recover bonuses paid to top executives whose misconduct led the company to restate its financial results. The provision being floated for inclusion in the financial-bailout bill is broader, giving the government the right to retrieve bonuses and incentive pay even if the executives weren't involved in any wrongdoing.

Write to Phred Dvorak at and Joann S. Lublin at


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