US enters new era with CEO pay caps

The United States is moving closer to dictating executive pay -- and its impact on corporate America could be huge (click here for an analysis).

On Wednesday morning, President Obama announced that corporations receiving new federal bailout money will have to limit their CEO compensation to $500,000.

If the rules had been in place last fall, when the Bush administration was handing out the first half of the TARP (Troubled Assets Relief Program), the CEOs would have howled. The CEO of Bank of America would have had to take a 97.9 percent cut in total compensation before the bank would have received its $45 billion in TARP money. The head of Citigroup would have seen his compensation fall 98.4 percent.

Limits on stock options

Sure, the chief executives can get company stock in addition to their half million. But it must be "restricted," which means they don't see a penny from their stock until the government has been paid off -- with interest!

Since the chances of that happening are on par with, say, Rod Blagojevich being reelected governor of Illinois, the Obama administration is offering those suddenly "poor" CEOs another out. After "a specified period," which so far is unspecified, they could cash in their stock if someone, presumably the administration, judged that the company "protected taxpayer interests or met lending and stability standards" or "other factors."

It's not exactly the "golden handshake" a lot of these corporate chieftains have come to expect.

Reward success, not failure

"This is America," Mr. Obama said in announcing the new caps. "We certainly believe that success should be rewarded. But what gets people upset, and rightfully so, are executives being rewarded for failure, especially when those rewards are subsidized by US taxpayers, many of whom are having a tough time themselves."

Will CEOs with troubled financial institutions agree to such drastic action? They may have no choice if failure or a government are the only other options.

Caps beyond TARP recipients

The new $500,000 cap on executive salaries extends beyond corporations receiving any new TARP money. The same limit applies to CEOs whose companies would be receiving what the administration calls "generally available" funds -- money aimed at industries, with predetermined limits on the amount, that is supposed to keep credit flowing.

So the CEO of such a company would have to accept a $500,000 limit, too, unless the company publicly disclosed his compensation package and allowed shareholders to have a nonbinding vote on that package. That's what many corporate reformers have been pushing for. (For more on "say on pay" efforts, click here.)

Up to now, disclosure has been the main thrust of refomers' efforts and much of the legislation on executive compensation. The exceptions are moves in the past two decades that have limited how much corporations could deduct from their taxes when they handed out stock options or OK'd golden parachutes for departing executives.

FDR demurred

Even in the 1930s, when the Roosevelt administration created the Securities and Exchange Commission and conducted an aggressive rhetorical campaign against big business, it did not move to set pay limits on CEOs.

But it is a new era of responsibility, as Obama puts it, and real anger over CEOs' failures, which have put the economy at risk.

So the least they can do is take a pay cut in which they still earn nearly 10 times the median US household income.