Yesterday, the Treasury Department outlined tougher compensation rules for executives of companies participating in any of the three programs created by the Emergency Economic Stabilization Act (the bailout). The CEO, CFO, and the next three highest paid executives will be affected.
Each of the programs carries unique rules for participants, including restrictions or disincentives for use of golden parachutes, and clawbacks for some bonuses given for gains that don't materialize. In the newest program—forebodingly named the "systemically significant failing institutions programs"—the treasury's assistance means "golden parachutes will be defined more strictly to prohibit any payments to departing senior executives."
While this may momentarily cool the foreheads of irate taxpayers, there may be larger problems ahead. I recently noted that severely limiting the ability of companies to attract and retain talent would be a bad idea—that less talent in the financial markets is certainly not what we want.
The treasury's compensation rules may send Wall Street's best and brightest to hedge funds or firms that aren't participating in the bailout and may also encourage companies to pay executives through channels that are unrelated to performance, the Wall Street Journal reports.
I talked this morning with Alan Levine, a partner in New York-based law firm Morrison Cohen's executive compensation and benefits department. Levine says that it will indeed very likely be a challenge for some of these firms to keep their top performers. But Levine points out a big problem for interested defectors: "There are a lot of people out on the street right now." People who lost jobs at Lehman Brothers, Bear Stearns, and various hedge funds are all looking for work—which may cause many to keep a "wait and see" approach before defecting for firms without compensation caps, Levine says.