Comp Regulations Tucked Into Rescue Bill

Tucked into the Emergency Economic Stabilization Act of 2008--also known as the bailout or rescue plan--are new provisions governing compensation of chief executives at those financial institutions selling troubled assets. While vague, Section 111 of HR 1415 approved by the U.S. Senate Wednesday and expected to go to the House for a full vote today, gives the federal government authority to regulate compensation.

H.R. 1424, approved by the U.S. Senate Wednesday by a wide margin, is expected to go to the House for a full vote today.

The bill stipulates that "when Treasury buys assets at auction, an institution that has sold more than $300 million in assets is subject to additional taxes, including a 20 percent excise tax on golden parachute payments triggered by events other than retirement, and tax deduction limits for compensation limits above $500,000."

Gordon Kaiser, corporate governance expert and partner with global law firm Squire, Sanders & Dempsey, says the legislation would grant authority to the federal government to regulate compensation for the first time.

"This is a huge change and could be the proverbial camel's nose in the tent," Kaiser said in a email to Directorship last night, "while the focus is initially on financial companies that sell troubled assets to the government, it paves the way for executive compensation limits in other circumstances and on other companies – in essence, achieving what the SEC, the IRS, and shareholder activists could not.”

Global Proxy Watch, in its lead story this morning, writes that given the bill's lack of specificity, U.S. pay practices might change little if President McCain appointed someone such as Phil Gramm to head the Treasury. On the other hand, the vagueness of the language could provide license to an aggressive President Obama appointee, especially one backed by the Democrat majority in Congress. The bill's single reference to a requrement of "appropriate standards" of corporate governance, GPW reports, is even fuzzier--and may hand the White House wide authority to intervene in companies. 

The bill's reach, if passed as is, would depend heavily on who occupies the White House come January.