Now there is no limit on base pay, and it remains to be seen if firms, out of determination to retain their top talent, will try to get around the spirit of the legislation by ratcheting that up. That’s what happened with equity-based pay in the mid-1990s when Congress established a $1 million tax deductibility limit for cash compensation.
Absent Treasury Department interpretations, firms would be “asking for trouble” if they try to do anything other than make market adjustments to executive compensation, according to Mark Poerio, a compensation and benefits partner with the law firm Paul Hastings. They could be held accountable for violating the principles of the law not only by public opinion, he said, but by the Treasury Department and states’ attorneys general.
I’ve Got It in Writing
A perhaps more troublesome loophole concerns the extent to which the limitation on incentive pay would apply to executives with pre-existing employment contracts calling for higher incentive compensation.
While the original TARP was silent on the employment-contract issue, the stimulus law explicitly says that “any bonus payment” payable under a written contract executed before February 11, 2009, is not subject to the requirement that incentive pay be limited to one-third of total compensation. However, that may not be as clear-cut as it sounds.
What if, for example, a contract stipulates a target bonus but says the actual payout depends on a subjective evaluation of the executive’s performance? “Will that be enough to bring it within the exception, or will the exception be only a contract right that’s objectively determinable, like 1 percent of profit?” Poerio said. “It all may depend on how a contract is written, but right now it’s not clear what’s going to fit within the statute.”
A Game of Leapfrog
Possibly the trickiest aspect of the law’s compensation provisions involves determining which executives are subject to them. The quick answer is that, for the largest firms, they apply to the five top officers and the next 20 most highly compensated employees, and to fewer and fewer people as firm size shrinks. There is not yet any guidance, though, as to how to specifically define “compensation” — for example, do currently value-less stock options count? — and thus how to specifically identify the most highly paid.
Even more perplexing is this: Once 25 executives’ pay has been restricted under the stimulus law, it is extremely likely that other employees, especially traders who earn most of their income from commissions and bonuses, will then be more highly compensated than the former top 25. Do they then become subject to the law? If so, when — immediately, or upon the next proxy filing? “These are questions that we don’t know the answers to yet,” said Poerio.
Barth said that while there has been some talk that Treasury will exclude largely commission-based pay arrangements from the applicability of the law, “no one really knows.”