U.S. sets executive pay limits for bailout companies

WASHINGTON Wed Feb 4, 2009 6:31pm EST

1 of 7. President Obama stands next to Treasury Secretary Timothy Geithner while speaking about corporate compensation at the White House, February 4, 2009.

Credit: Reuters/Larry Downing

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WASHINGTON (Reuters) - President Barack Obama took on bailed-out Wall Street firms on Wednesday, setting a $500,000 annual cap on pay for top executives at companies receiving taxpayer funds and tapping popular anger over financial sector excesses.

Obama said more measures would be outlined next week to overhaul the crisis-hit U.S. financial sector, which has been propped up with billions of dollars in public funds.

"This is America, we don't disparage wealth. ... What gets people upset, and rightfully so, is executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers," he said.

The president won support in Washington, with some Republicans who were critical of the financial sector bailout praising the move. But Wall Street critics said the compensation cap was a political gambit that could prompt a talent flight from affected firms.

Obama, a Democrat who succeeded Republican George W. Bush two weeks ago, said his administration would not allow public money to be wasted on payouts to CEOs whose businesses helped spur the financial and economic crisis.

"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," he said.

Treasury Secretary Timothy Geithner said he would give details next week of a comprehensive financial recovery plan.

Obama, pushing a broad stimulus package worth nearly $900 billion to prod the economy out of recession, repeated his call for bipartisan efforts to back the bill.

The new U.S. rules, which are not retroactive, would require companies that get exceptional government funds in the future to abide by the cap. This could include companies outside the financial sector, including auto manufacturers.

Additional compensation must be limited to restricted stock that does not vest until government money is paid back with interest, according to the new rules.

Companies that have previously received bailout money -- such as financial giant Citigroup and insurer AIG -- would have to agree to stricter oversight and prove they have followed already established limits on executive compensation, which were widely seen as being too lax.

CRITICISM AND PRAISE

Some Wall Street analysts and observers said affected financial executives might vote with their feet and accused Obama of playing to the crowd.

"This is pure political grandstanding. If the limit has bite, it will be counterproductive and the unintended consequences will hurt the U.S. as skilled and bright senior managers make choices," said David Kotok, chief investment officer at Cumberland Advisors. "If the limits have loopholes, they are a sham. Industrial policies fail. So will this one."

The restrictions announced on Wednesday were likely to be popular with average Americans who have been reeling from job losses and financial worries as the recession bites.

New York officials reported last week that Wall Street companies paid $18.4 billion in bonuses to employees last year even though the government had to intervene to save the sector from collapse.

"Thank you Mr. President. It is definitely time," said Dawn Berry, a flight attendant from Scottsdale, Arizona.

"Maybe it will send a message to the other CEOs and decision makers at top levels of management. ... Don't go around living high on the hog when you have employees who are wondering each day if they come in to work, if it's going to be their last day."

Obama's move followed a set-back on Tuesday when his pick for health secretary withdrew over income tax problems.

The president said in television interviews that he "screwed up" over the issue and he used the signing of a new children's health care law on Wednesday to push Congress to quickly approve the stimulus plan and broad economic reconstruction.

Supporters of his move on executive pay included the leader of the Republicans in the U.S. House of Representatives, John Boehner. Many Republicans in the Democrat-controlled Congress have been resistant to government bailouts, even when fellow Republican Bush was president.

"I think if anybody is looking to the taxpayer to help bail their company out, these kind of executive compensation limits are appropriate," Boehner said.

Republican Representative Mike Pence, who said he had opposed the finance sector bailout to begin with, said, "maybe it is going to wake up American business -- that there is a cost when you invite the 800 pound gorilla of government into your boardroom."

Senate Democrats worked on Wednesday to revise their plan for the broad stimulus package to drum up enough support so they can send it to Obama next week to sign into law. Republicans have argued for more tax cut provisions.

Obama's move on pay limits mirrors efforts made or under consideration in other countries hit by the economic downturn.

European Union finance ministers have said managers of bailed-out European banks should "not retain undue benefit," but they imposed no specific limit. Germany plans to set a 500,000 euro pay limit for executives at rescued banks as well as a ban on bonuses and stock-option grants.

(Additional reporting by David Alexander, Tim Gaynor and Vikram Subhedar; editing by Frances Kerry and Todd Eastham)