WASHINGTON - An effort to limit executive pay at the nation's most troubled banks inserted at the last minute into Congress' mammoth economic stimulus bill has sparked an outcry from financial services groups and others who warn that the caps could harm the government's efforts to revive the economy.
During negotiations on the $787 billion package last week, Sen. Christopher J. Dodd, chairman of the Senate banking committee, slipped in a provision that limits bonuses for executives at institutions receiving bailout funds to one-third of their salaries. The bonuses could be paid only in stock that could not be redeemed until the government has been paid back in full.
The stimulus bill is expected to be signed into law Tuesday by President Barack Obama in Denver. But the executive pay cap could prompt a clash between the White House and Senate Democrats later if the White House seeks a legislative adjustment.
The limits go beyond those advocated by the Treasury Department and surprised Wall Street. Most troubling, financial services experts say, is that the caps apply not just to senior executives, but to traders, investment bankers, fund managers and others who operate largely on commission-based compensation systems that reward them for performance.
Dodd, a Democrat from Connecticut, also made the provision retroactive, which means it applies to the more than 350 firms that have received federal funds since the government launched its Troubled Asset Relief Program last fall. It would affect senior executives and as many as 20 of the highest-paid employees of a participating firm.
"We expected compensation restrictions on TARP company executives, but on not the sales force," said Scott Talbott, head of government affairs for the Financial Services Roundtable in Washington.
Talbott and others warn the measure could have unintended consequences, from forcing companies to raise salaries of executives and traders to dodge the lid on bonuses, to driving talented employees to companies in the U.S. that aren't subject to the regulation, or to overseas banks. It also could give institutions an incentive to pay back the government in full before they have regained their financial footing.
Dodd's provision has undeniable political and populist appeal. Reports of lavish bonuses paid to executives at Merrill Lynch and other firms that received billions in aid angered Obama and others.
But while the White House proposed a cap of $500,000 on bonuses for executives and wanted the restrictions to apply only to institutions that take government money in the future, Dodd's measure goes much further, leading to speculation that Obama could seek a fix.
"As he has already expressed, the president shares a deep concern about excessive executive compensation at financial firms that are receiving extraordinary assistance from American taxpayers," White House spokeswoman Jennifer Psaki said. "He looks forward to working with Congress to responsibly address this issue. Members of the administration contacted members of Congress with suggested technical changes toward that end."
According to a senior administration official, the White House is concerned that the provision could push banks and other financial institutions to repay the government too quickly - before credit is flowing freely to consumers and other borrowers - in order to be able to retain and recruit top talent.
Dodd said yesterday that "these bonuses are meant to be performance-based, but too often Wall Street executives took too many risks and made decisions for short-term gains, rather than long-term viability."
Talbott said he was also concerned that institutions that need to be turned around won't be able to retain talent. "The soon-to-be law prohibits commissions. This will make it difficult to attract and retain top sales people, the lifeblood of any company."