Treasury Outlines New Pay Rules for TARP

The Treasury Department announced new rules late Wednesday that ""limit executive compensation"":http://www.treas.gov/press/releases/tg165.htm for lenders who have received bailout money from the government. Such restrictions have stirred controversy within the financial sector and are the primary reason many banks want to start repaying the taxpayer funding they received through the Troubled Asset Relief Program (TARP).
According to Treasury Secretary Timothy Geithner, executive compensation practices were a contributing factor to the current financial crisis. He says individuals' incentives for short-term gains outweighed checks and balances, and led to excessive risk-taking.
For the most part, the ""new rules"":http://www.treas.gov/press/releases/tg165.htm implement restrictions Congress passed earlier this year. Specifically, the rules limit bonuses paid to senior executive officers and other high-paid employees to one-third of total compensation. They also encourage firms to pay high-level salaries in the form of stock that must be held for a long period of time, and cannot be cashed in until all TARP funds have been repaid. The board of directors of each TARP recipient will be required to implement corporate policies on luxury or excessive expenditures. In addition, golden parachute payments, upon an employee's departure or change in control of the company, are prohibited.
Geithner said executive compensation packages should reflect long-term corporate performance, using standards beyond the company's stock price. He also called for greater transparency and accountability in the process of setting compensation and stressed that internal risk managers should be given more authority to prevent over-leveraging.
Geithner told reporters after a compensation meeting with other regulators on Wednesday that the administration was not looking to cap how much executives are paid. However, its plan to rein in excessive corporate salaries also creates a new post of Special Master for TARP Executive Compensation, who will have broad discretion over executive pay packages at companies receiving ""exceptional assistance"" from the government. The administration has already named Kenneth R. Feinberg to the position.
The Treasury called Feinberg a ""highly-respected mediator."" Feinberg is a Washington attorney and was responsible for the government's efforts to compensate the victims of September 11th. He is charged with setting pay for 175 top executives at seven of the nation's largest companies that are considered to have received exceptional aid already - including Bank of America, Citigroup, GMAC, and AIG.
For 80 other financial institutions that have taken federal money, Feinberg will develop the overall compensation structure, but is not responsible for setting exact pay levels of individuals. As Special Master, he has also been given the authority to review bonuses, retention awards, and other compensation paid before February 17, 2009 by TARP recipients, and, where appropriate, negotiate reimbursements to the federal government. According to a _""New York Times"":http://www.nytimes.com_ report, Feinberg himself will not receive any government compensation.
In addition to the new TARP pay rules announced Wednesday, the administration has submitted a proposal to Congress which would grant shareholders of any company - not just those receiving federal aid - the power to approve or revoke the annual compensation packages of the company's top five executives. Geithner said the administration will work closely with Congress to get this so called ""say-on-pay legislation"":http://www.treas.gov/press/releases/reports/fact_sheet_say%20on%20pay.pdf passed, to give stock owners a stronger voice and hold directors more accountable. The legislation would also extend the powers of the Securities and Exchange Commission (SEC) and provide greater independence to ""corporate compensation committees"":http://www.treas.gov/press/releases/reports/fact_sheet_indepcompcmte.pdf.