Executive pay: Making Wall Street pay it back

Now that much of the US financial system is on government life support, these are humbling days for Wall Street's top echelon of managers. This is a crowd used to calling its own shots. Congressional Democrats and the incoming Obama Administration want to impose stringent rules on executive compensation before any more government money is pumped into troubled Wall Street firms and banks.

So far, financial institutions that have received cash from the government's big rescue mission, the $700 billion Troubled Asset Relief Program, or TARP, haven't had to cope with huge oversight on pay. So-called clawback provisions that would force executives to return incentive compensation have so far applied only in cases of obvious corporate fraud stemming from materially inaccurate financial statements that distort earnings.

At the request of the Obama transition team, Congress is now considering release of the second, $350 billion installment of TARP funds. And Representative Barney Frank (D-Mass.), the powerful Democratic chairman of the House Financial Services Committee, and President Obama's chief economic adviser, Lawrence H. Summers, want to sharpen the clawbacks. "If they get the second $350 (billion), it will come with tougher rules," Frank says. "If they don't like them, they can give the money back."

Specifically, Frank now wants banks to accept the tougher pay terms applied to the auto companies that received government aid. For example, the banks' top 25 highest-paid employees would not receive bonuses, and a ban on excessive exit packages would be imposed for the duration of their TARP involvement. As before, clawbacks would kick in on financial statements that were later restated.

Congressional Democrats and the Obama team are certainly mindful of the public anger now directed at Wall Street. Even once-revered former Treasury Secretary Robert Rubin, who, according to compensation data tracker Equilar, collected $118 million in pay between 1999 and 2006 while serving as director and senior counselor at Citigroup, has taken some heat.

Don't hold your breadth

Citigroup, JPMorgan Chase, Goldman Sachs, and other banks insist they will comply with rules on executive pay, though the US Chamber of Commerce wants any new executive pay provisions to define more clearly what would trigger a clawback.

Even if Frank gets what he wants, don't expect a rash of recouping. Why? The provision doesn't apply to leaders who simply made poor business decisions. "Many companies claim they have clawback provisions, but they're limited only to cases of fraud," says Richard Ferlauto, head of corporate governance at the American Federation of State, County, and Municipal Employees. Moreover, once granted, compensation is tough to retrieve.

The 2002 Sarbanes-Oxley Act had a clawback rule, but it was so poorly worded as to be almost useless. TARP's provision is broader than that found in SarbOx, but it's still subject to a range of interpretations. "Clawbacks sound simple," says Carol Bowie, a corporate governance expert at RiskMetrics Group in Rockville, Md. "But there's a lot of gray area in there."