Senator Grassley Says Executive Pay Limits Undermined by Bailout Shift - 14 Nov 2008

Grassley Says Executive Pay Limits Undermined by Bailout Shift

By Ryan J. Donmoyer and Robert Schmidt

Nov. 14 (Bloomberg) -- A Republican senator said Treasury
Secretary Henry Paulson's change in course on a $700 billion
bailout of the U.S. financial industry will undermine
restrictions on executive pay at companies receiving federal
aid.

Iowa Senator Charles Grassley, the top Republican on the
Senate Finance Committee, said tax penalties on golden parachute
severances and pay exceeding $500,000 for companies' top five
officers aren't enforceable under Paulson's strategy of buying
stakes in banks.

``It would appear that no penalties will apply to
institutions that receive taxpayer funds and violate the act's
restrictions on executive compensation,'' Grassley said in a
letter to Paulson released by the senator's office.

Paulson's original plan was to buy troubled mortgage assets
from financial institutions. Yesterday he announced he would use
the second half of the rescue program to help relieve pressure
on consumer credit.

Congress relied on tax penalties in the rescue plan to give
weight to executive pay limitations. Those restrictions fell
short of what lawmakers including Montana Democratic Senator Max
Baucus, the Finance Committee chairman, said they wanted.

Tax Penalties

The penalties, applying to companies that sell at least
$300 million in troubled assets to the Treasury Department,
would deny corporate tax deductions for pay in excess of
$500,000 to the chief executive, chief financial officer and the
next three highest-ranking executives. Also, a 20 percent surtax
would be imposed on senior officials who receive large
severances.

There are no restrictions on payments to officials beyond
the top five officers.

The Treasury Department, in an Oct. 14 notice, said all
financial companies getting federal aid must submit to
restrictions on executive pay that go beyond what Congress
passed.

``Companies participating in the program must adopt the
Treasury Department's standards for executive compensation and
corporate governance for the period during which Treasury holds
equity issued under this program,'' the Oct. 14 notice said.

Even so, Grassley said the Treasury Department would have
little recourse if companies violated the agreement.

``Treasury is not constrained by the act and should be
exercising its broad authority to issue regulations that further
limit executive compensation and other expenses paid by
institutions that are receiving funds under the act,'' Grassley
said.

All But $60 Billion

Paulson has committed all but $60 billion of the initial
$350 billion allocated by Congress to take equity stakes in
banks and in insurer American International Group Inc.
Lawmakers, who could reject Treasury requests for the remaining
$350 billion, are pushing for aid to automakers, including
General Motors Corp.

Democrats in Congress demanded pay curbs in the rescue
legislation after learning that executives at firms that already
got federal aid, such as Fannie Mae and Freddie Mac, were set to
pocket millions of dollars. Their regulator on Sept. 15 blocked
$24 million in such payments to the companies' officers.

Andrew DeSouza, a Treasury Department spokesman, said the
department was still reviewing Grassley's letter and had no
immediate comment.

To contact the reporters on this story:
Ryan J. Donmoyer in Washington at
rdonmoyer@bloomberg.net;
Robert Schmidt in Washington at
rschmidt5@bloomberg.net

Last Updated: November 14, 2008 00:01 EST