Few who know anything about executive compensation, it seems, are fans of how the government’s financial-services rescue programs address the issue.
While the Treasury Department has not yet issued guidance on how to interpret or implement most of the vaguely worded pay provisions in the federal Troubled Asset Relief Program, observers aren’t waiting around to voice their displeasure.
Particularly troubling to these critics is their growing suspicion that a new presidential administration and Congress will try to expand the bailout legislation’s compensation restrictions — meant to limit pay at troubled companies — by applying them to the entire community of public companies, as well.
Such an effort would most likely be mounted if Barack Obama wins the White House and Democrats score big majorities in the House and Senate, according to Steve Barth, a partner in the transactional and securities practice at the law firm Foley & Lardner. “We think [the legislation] is the blueprint for what is going to be imposed on all public companies, and that will raise some incredibly complex issues,” he told CFO.com.
For example, he pointed to the provision whereby financial firms that sell troubled assets directly to the government, or receive an equity infusion, would be prohibited from structuring pay packages encouraging executives to take “excessive or unnecessary risks.”
The Treasury Department has not explained how it will define that phrase, but to Barth, discouraging risk-taking is antithetical to a healthy free-enterprise system. “If you apply these rules designed for troubled financial institutions to, say, software firms or other very entrepreneurial companies, what will it do to their capital-raising and business-development efforts? These companies are in the business of high risk. Are we really going to disincentivize risk-taking?”
And there would be further seepage into the private sector, as happened with the Sarbanes-Oxley Act, Barth noted, because most companies with a notion of going public someday adopt public-company rules as a matter of course.
Richard V. Smith, senior vice president and principal at Sibson Consulting, said he thinks a bid to broaden the bailout legislation’s applicability will happen no matter who is president. “Whether executive pay in public companies can actually be regulated, I don’t know,” he said. “But I think there will be a legislative attempt.”
That would be most unwise, however, Smith added, predicting that the best and brightest executives would flock to hedge funds and other private companies. “We wouldn’t get the talent we need to drive public companies and this economy,” he said. “And out of 15,000 public companies, how many are in trouble? It’s really only the financial services industry.”
Perhaps there will be seepage into nonfinancial firms even if the government does not drive it. Kenneth Raskin, the head of White & Case’s global executive compensation, benefits, and employment law practice, said he already had received calls from some clients asking whether they should subject themselves to some of the new compensation rules.