Executive-pay restrictions in the economic
stimulus package could reach much further into the ranks of affected
companies than previously believed, depending on how a crucial but
confusingly written provision is interpreted, lawyers and compensation
consternation about the new pay restrictions continued to grow, with some
financial-industry insiders predicting an upheaval in industry
compensation structures and a slow brain drain from affected firms.
The stimulus bill, which was signed into
law Tuesday by President Barack Obama, contains a provision that limits
bonus payments to no more than one-third of annual total compensation at
banks and other companies that have taken federal bailout money. For the
biggest such institutions, the limit affects the five top officers, plus
the 20 next most highly compensated employees -- effectively the 25
highest-paid people at an institution.
But the law doesn't define how those 25 are
to be identified. It leaves the details to the Treasury Department, which
is supposed to announce interpretive rules in the coming weeks.
One possible interpretation, according to
lawyers, results in an oddly circular effect that could cap pay for
everybody. If a bank identifies the 25 people it intends to pay the most
this year, then restricts their pay, that group no longer would be this
year's 25 highest paid. Then 25 new people would become the highest paid,
and their bonuses will have to be capped, and so forth.
Another possibility is that a bank could
cap the pay of the 25 who earned the most in 2008. Those people likely
would no longer be the highest paid in 2009. But that means a different
group would have that distinction, and this second group's pay would then
be capped the following year, while the first group's pay would be
The result could be a "weird game of
leapfrog" in which groups of 25 executives trade places as the highest
paid every year, said Christian Chandler, an executive-compensation
attorney at Hogan & Hartson LLP in Washington.
A senior executive responsible for human
resources at an investment bank that has taken federal bailout money
pointed out that many of the 25 people at his firm who made the most in
2008 no longer work there. "This [provision] is completely unworkable,"
the executive said. "It's creating mass confusion."
Other lawyers predicted potential
gamesmanship, in which affected institutions quietly promise to pay capped
executives more in coming years, or pick sacrificial executives to be this
year's "highest paid." One said the Treasury might have to issue
A Treasury official said details of the
executive-pay plan were still being worked out, but added that the
administration thinks there's enough wiggle room in the law to prevent
unintended consequences or damage to the broader goal of restoring
stability to the nation's financial system.
Some experts and industry insiders
predicted unintended consequences nonetheless. Typically, big banks and
Wall Street firms have paid their top earners a small salary, but offered
the potential to earn a large bonus depending on performance. By being
forced to cap bonuses, banks will have no choice but to ratchet up
salaries, some predict.
"To be put in a situation where you're
limiting performance-based compensation is the dumbest thing you can do,"
said the senior executive at the investment bank. "Everything that
shareholder advocates have been seeking for years is thrown out the
This executive offered a hypothetical
example of a head of commodities trading paid $10 million in 2008, only
$250,000 of which represented salary. "If you want to keep this
commodities trader, you have to increase his salary to $8 million," he
said. But the trader collects that substantial sum even though "you have
no idea about his total performance for the year" -- and the firm can't
recoup his salary if his performance falls short, the executive said.
Alan Johnson, managing director of Johnson
Associates Inc., a New York compensation consultancy that advises Wall
Street firms, predicted that the legislation as written would result in a
mass exodus of top earners. "Who would stay for a 90% pay cut?" Mr.
James F. Reda, another New York pay
consultant, agreed that there could be a talent exodus, but he said it
would likely be a "brain trickle, not a brain drain." There aren't many
firms hiring, he said, and ex-bankers who want to strike out on their own
may find it difficult to raise capital to back them.
Write to Mark Maremont at
Joann S. Lublin at