A Chance to Rein In Executive Compensation?

I hate legalese! It is definitely not my first interest, nor my strong passion. Why am I so cynical about the immense implicit trust society places in the construction of the words that supposedly steers us toward justice and harmony, the same way the apostle Paul minimalized the power of the law to save our souls? Maybe I just dislike having to sift through the jargon to get to the core, and I mock how it is far too easy for unscrupulous people to find and abuse loopholes.

With the massive bailout program now approved, I couldn't help clicking on a tiny link in today NY Times pointing to the text of the bill. I didn't know why I did it, but maybe I just wanted to know the original writings about the different provisions and sweeteners that reflect the compromises politicians had to maneuver, instead of relying on what the press tells me. Specifically, I was interested in one of the earlier provisions was the limit on executive pay. Whether this bill will reign in executive compensation remains to be seen. But the bill includes both broad guidance that allows for various applications true to the intent of the law as well as specific mandates that can be the bill's undoing.

For example, under this bill, companies who sell toxic assets to the Treasury are simply not allowed to have components in their pay packages to senior executives that incentivize too much risk taking. Such components, it is argued, threatens the viability of these companies. How is "too much" defined? In other words, what is the number or value of stock options issued that would be considered too much? Will we know before the company tumbles? If not, can we have a retroactive claim? Fortunately, these questions are answered by the second provision which allows companies to recoup any pay based on earnings later proven incorrect. The third mandate specifically prohibits golden parachute payments to the top 5 named executive officers. Note, this phrase uses the word "payments". That means companies can still enter into contracts with their executives to lavish them with different types of severance packages as long as no payments go out. All an executive has to do is wait for the Treasury to dispose ownership of the toxic assets, because at that point, the company is no longer bound to this law. This could be a short time or an extended time, but the point is that this law does not have any punitive effect for the damage done. But wait, it gets interesting. The last section stipulates that companies cannot create any new compensation contracts with golden parachutes if the amount they received from the Treasury is more than $300 million. That means if they took only $250 million tax payer dollars, then their executives can negotiate termination agreements where they can walk away with deluxe packages at virtually anytime.

Laws are written with unexpected consequences. If there's anything we should have learned from Clinton-era law that defined what portion of executive compensation should be tax-deductible, it should be that defining a benefit threshold pushes everyone toward that threshold. I have a feeling the same thing will happen here.