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New York Times, February 8, 2009 column


The New York Times




February 8, 2009

Fair Game

Bailout Needs Some Strings Attached to Limit Pay

JUST in case you missed it: The Congressional Oversight Panel monitoring the Treasury Department’s bailout of broken banks — the Troubled Asset Relief Program — reported last week that Henry M. Paulson Jr.’s team at Treasury paid significantly more for the assets it bought from banks than they were worth when the deal was announced in the fall.

“The panel’s analysis revealed that in the 10 largest transactions made with TARP funds, for every $100 spent by Treasury, it received assets worth, on average, only $66,” the report said. “This disparity translates into a $78 billion shortfall for the first $254 billion in TARP funds that were spent.”

More taxpayer money down the drain, alas. And all the more reason to focus closely on executive pay restrictions at any bank that receives TARP funding.

Although our long-running financial despond has produced few real positives, surely this is one: Investors are finally seeing just how regally executives live on their shareholders’ dimes. Maybe now they will do something about it.

During good times, banks either hide or try to justify such perks as fleets of corporate jets and Las Vegas junkets. But as companies run to taxpayers for their bailout billions, they are now being forced to forgo the Gulfstreams, the tee times at Pebble Beach and those sumptuous spa treatments.

Could shame, that long-lost American character trait, be making a comeback? Not likely. So it’s important to make Washington’s plan to rein in executive pay airtight. Loud rebukes against executive excess are amusing, but a $500,000 cap on salary means only that the executives will be paid some other way. And requiring companies to recover compensation only if an executive is found to have lied on financial statements? Good luck with that.

“The bite doesn’t match the bark,” said Brian Foley, an independent compensation consultant in White Plains. “Or, put another way, this looks like nip and tuck in a triage situation.”

Trying to change the entitlement mind-set that drives executive pay practices is a worthy goal, of course. After all, taxpayers are being asked to redistribute their future wealth by putting billions into banks, all in the hopes of getting the economy to stir.

But if even some of that money goes to cushy pay and obnoxious perks, then we are pouring water into a very leaky — and undeserving — bucket.

With that in mind, here are some ideas for how to hold taxpayer-supported executives accountable for their actions, both past and future. Some of these approaches could actually generate money for beleaguered taxpayers.

Let’s begin with restrictions on severance payouts. According to TARP guidelines put in place last fall, severance is limited to the average compensation received by an executive over the previous five years.

At some companies this is no hardship. Lloyd C. Blankfein, the chief executive of Goldman Sachs, made $100 million in just salary and bonus from 2003 through 2007, the most recent year for which figures are available. Under TARP, his severance limit on salary and bonus (not counting other compensation, such as stock grants and perquisites) would be $20 million.

Mr. Blankfein might find that unbearable, but few others would.

Here’s an alternative approach. How about requiring that any severance pay over $1 million be subject to an excise tax of 20 percent? This is the amount levied on golden parachutes, and it could easily be applied to severance at companies tapping the TARP.

Furthermore, why not extract a 20 percent tax on all perquisites exceeding $50,000 that are given exclusively to top executives each year? These include such delectables as cars and drivers, country club memberships and personal use of corporate aircraft. If the government won’t bar perks outright, then executives should have to give something back for the freebies.

And while we are on the subject of excise taxes, the government should ban the deplorable corporate practice known as the gross-up, in which shareholders pay to cover an executive’s tax bills. Rank-and-file employees at these companies, who have been hit hard by the crisis, don’t get these deals. Why should anyone?

(Of course, some executives will try to get around a ban on gross-ups by asking for a special stock or option grant that will cover the tax bill. Directors would have to be on the lookout for these kinds of end-runs.)

A final suggestion: While taxpayer money flows, companies should have to freeze all contributions to executives’ supplemental retirement plans. These are the lovely pots of gold that grow larger every year, even as employee 401(k) plans plummet. Given that these executive safety nets never fray, their beneficiaries can afford a few years when contributions are frozen if TARP money is tapped.

IT is also important for the government to provide as many incentives as possible to get taxpayers’ money paid back quickly. So any executive pay restrictions might also state that if TARP funds are returned within a certain period — say, 18 months — the penalties can be avoided or refunded.

“Taxpayers need more bang for their buck. We have a right to insist on some accountability,” Mr. Foley said. “If you take a meaningful amount of TARP money, you need to tighten your belt.”

That which does not kill you makes you stronger, as the saying goes. If out of this near-death economic experience, shareholders emerge stronger and tougher on directors about me-first executives, more to the good.

But in the meantime, it is the government that must be resolute on taxpayers’ behalf. So far, as the Congressional Oversight Panel’s report demonstrates, it has fallen short.



A version of this article appeared in print on February 8, 2009, on page BU1 of the New York edition.



Copyright 2009 The New York Times Company




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