Monday, October 27, 2008

Paulson Wimps Out On Executive Pay

Last week I praised Mr. Paulson for attacking one obvious flaw in the bailout bill's executive compensation limits: the Stan O'Neal Memorial Loophole, in which you fire a guy but pretend he left for some other reason so he can keep his golden parachute.

Does this mean I’m loving the way Treasury is carrying out Congress's orders to crack down on excessive compensation at bailed-out banks?

Heavens, no.

First of all, Mr. Paulson is doing the bare minimum the law requires, although he has broad powers to set "appropriate" compensation standards. I can promise you that if I'm appointed Treasury Secretary, I’ll have a lot more fun with this authority.

And in an act of extreme naivete, or extreme cynicism, the current Secretary is putting his trust in the firms’ own compensation committees, those souls of generosity who helped bring about this enjoyable economic moment.

One of the most useful tools in the bill - potentially - is Congress's directive to get rid of compensation plans that could inspire executives at bailed-out firms to take "unnecessary and excessive risks.” But Mr. Paulson has merely delegated this job to each firm's compensation committee, with a few vague instructions. For example, he tells the committees to meet with senior risk officers - once a year - to contemplate the “relationship” between compensation and risk management. Once a year? I'm choking on my gummi bears here, and it's really hard to choke on those things.

And Mr. Paulson’s compensation rules cover only the CEO, CFO and the next 3 highest paid officers. This crazily leaves out many of the traders who got us into this mess, and the ones who'll probably get us into the next one.

Also, as Carl Icahn pointed out on his blog, the golden parachute ban doesn’t kick in unless a severance package adds up to triple an executive’s annual pay. So a bailed-out CEO who’s been averaging $10 million in salary and bonus for the last five years could still get fired for incompetence and head off to Golfland with $29 million in severance.

I suspect boards won’t take advantage of that particular loophole in the immediate future, as they won't want to risk the slings and arrows of Andrew Cuomo and Henry Waxman. But, jeez, Hank, this is no time to be such a wuss. Get out there and have some fun.

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