Barack Obama Unveils New Rules To Curb Executive Pay

President Obama imposed tough new rules to rein in corporate pay, capping executive compensation at $500,000 a year for companies receiving taxpayer funds and limiting lavish severance packages paid to top officials.

"In order to restore our financial system, we've got to restore trust. And in order to restore trust, we've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street," Obama said in announcing the steps at the White House. He called such packages "the height of irresponsibility."

AP Barack Obama

Obama, who sharply criticized Wall Street chiefs for accepting billions of dollars in bonuses last year while the economy staggered toward collapse, had promised compensation reform as part of a package of stricter regulations on the financial industry.

• What's In the New Rules
• Read the President's Statement

"For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only bad taste—it's bad strategy—and I will not tolerate it as president," said Obama, who has been in the White House just two weeks. "We're going to be demanding some restraint in exchange for federal aid."

The restrictions are a first step in a broad effort to overhaul pay practices and are likely to be popular with average Americans who have been reeling from job losses as the recession bites.

Obama and senior congressional Democrats are also seeking to push through an economic stimulus package of almost $900 billion despite Republican criticism that it focuses too much on government spending and not enough on tax cuts.

Here are main elements of the restrictions:

COMPANIES GETTING EMERGENCY AID

—Senior executives limited to $500,000 in total annual compensation plus restricted stock awards.

—Any pay over $500,000 must be in restricted stock or a similar long-term incentive arrangement. The senior executive will only be able to cash this in after the government has been repaid or after a specified period of time/requirements have been met.

—Senior executive compensation structure must be submitted to a nonbinding shareholder resolution, or "say on pay."

—The top 25 senior executives will be subject to a provision to claw back bonuses and incentive compensation if they are found to have given inaccurate information regarding
their own incentive pay. Previously just the top 5 executives were subject to this provision.

—The number of top executives who are banned from receiving any golden parachute payment upon severance from employment is expanded to include the top 10 senior executives.
In addition, the next 25 executives will be prohibited from receiving any payment greater than one year's compensation upon severance from employment.

—The boards of directors must adopt a company-wide policy on excessive or luxury expenditures related to aviation services, office renovations, entertainment and holiday
parties.

COMPANIES GETTING GENERALLY AID

—Senior executives will be limited to $500,000 in total annual pay plus restricted stock unless waived by public disclosure and, if requested, a "say on pay" shareholder resolution. All firms must review and disclose reasons that pay arrangements of executives and other employees do not encourage excessive, unnecessary risk taking.

—Same clawback provision as that imposed on companies receiving emergency aid applies.

—Upon severance, the top five senior executives will not be allowed a golden parachute payment greater than one year's compensation. Previously the golden parachute cap was set at three years' compensation.

—Same requirement for luxury expenditures as that imposed on companies receiving emergency aid.

Companies that have previously received bailout money—such as financial giant Citigroup [C 3.06 -0.43 (-12.32%) ] and insurer AIG [AIG 0.78 -0.07 (-8.24%) ]—would have to agree to stricter oversight and prove they have followed already established limits on executive compensation, which are widely seen as being too lax.

The White House aims to hold banking executives accountable for the government money they receive, presenting the new rules as being in the interest of shareholders and taxpayers alike.

The proposals drew a mixed reaction, from Washington to Wall Street to Corporate America..

“Golden parachutes and limits on pay fundamentally tie into whether you’ll be able to hire and recruit people to work at these large troubled companies," said Claudia Allen, who chairs the corporate governance group at Neal Gerber & Eisenberg, a Chicago-based law firm."These new rules may make it difficult to recruit quality candidates in the future."

However, this move is symbolic in that it sends a strong message to all companies, not just those receiving bailout funds. Obama is sending the message that companies need to focus on pay for performance."

Obama's move comes amid public outcry over $18.4 billion in bonuses paid out in 2008 at a time when taxpayer money was shoring up the financial system.

Source : http://www.cnbc.com/id/29013179