WASHINGTON — Amid populist outrage over Wall Street excess, President Barack Obama unveiled new compensation rules for financial institutions that accept government assistance, saying it is "in bad taste" and bad strategy for executives to receive lavish pay packages during an economic crisis.
"We're going to be demanding some restraint in exchange for federal aid — so that when firms seek new federal dollars, we won't find them up to the same old tricks," Obama said at the White House.
The president was joined by Treasury Secretary Timothy Geithner, who will release additional details of the administration's financial rescue plans next week, a strategy widely expected to cost more than the $350 billion remaining in the Troubled Asset Relief Program.
The new rules on executive compensation announced by the White House moments before Obama's speech include a cap on salaries for executives at companies that receive "exceptional" government aid. That standard applies to firms that have individually negotiated agreements with the Treasury Department, such as American International Group Inc., Bank of America Corp. and Citigroup Inc.
Under the new rules, companies that already have received rescue funds from the Treasury Department will have to comply with existing regulations. But top executives at firms that receive exceptional assistance going forward won't be allowed to make more than $500,000 a year. Any additional compensation would be made in restricted stock that won't vest until taxpayer funds have been repaid.
A senior administration official, briefing reporters on background, said "senior management" at those firms will be subject to the rule, leaving the details on exactly who must comply to be worked out in specific contracts.
Firms that participate in "generally available capital access programs," such as the Treasury's Capital Purchase Program, a far larger swath of firms, also are subject to the new rules. The top five executives at each of those banks, will be subject to the $500,000 compensation cap, though the cap can be waived after disclosure of their compensation and, if requested, a non-binding "say on pay" shareholder resolution. In addition, firms participating in a future capital access program must review and disclose the reasons that their compensation arrangements don't encourage excessive and unnecessary risk taking.
The regulations, designed to address public rage at Wall Street excess while not discouraging banks from participating in government rescue programs, are stricter than existing rules. Under the old rules, recipients of government assistance couldn't take a tax deduction on executive compensation above $500,000.
"This is America. We don't disparage wealth," Obama said. "We don't begrudge anybody for achieving success. And we certainly believe that success should be rewarded. But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers."
All banks will face stronger restrictions on golden parachutes and, following public criticism of Citigroup's planned purchase of a new corporate jet and other reports of big spending at Wall Street firms, a clampdown on extravagant expenditure. Companies will have to adopt a policy on any expense related to aviation services, office renovations, holiday parties, and conferences.
A senior administration official said the White House is aware that firms have a legitimate need for conferences, sales retreats and other events. As for what kind of spending would be frowned upon, "you know it when you see it," the official said.
At firms receiving exceptional assistances, the top 10 senior executives wouldn't be prohibited from receiving any golden parachute payments. At least the next 25 executives would only be eligible for a golden parachute payment of up to one year's compensation. The top five executives at firms taking part in generally available capital access programs will not be allowed to receive a golden parachute payment greater than one year's pay.
"We're putting a stop to these kinds of massive severance packages we've all read about with disgust; we're taking the air out of the golden parachute," Obama said.
The rules also implement clawback provisions designed to get back bonuses and incentives from any of a firms' top 25 senior executives if they are found to have "knowingly engaged in providing inaccurate information relating to financial statements or performance metrics used to calculate their own incentive pay."
Obama's announcement, which he previewed in a series of television interviews Tuesday, follow his critique of Wall Street last week. He repeated his view Wednesday that the nearly $20 billion in bonuses paid out last year are "shameful" and "the height of irresponsibility."
"We all need to take responsibility. And this includes executives at major financial firms who turned to the American people, hat in hand, when they were in trouble, even as they paid themselves their customary lavish bonuses," Obama said. "That's exactly the kind of disregard for the costs and consequences of their actions that brought about this crisis: a culture of narrow self-interest and short-term gain at the expense of everything else."
Obama said Wednesday's announcement is part of a longer-term reform effort to restore confidence in the financial sector. Geithner will host a conference on executive pay at a later date in an effort to establish best practices and guidelines.
"We're going to examine the ways in which the means and manner of executive compensation have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system," Obama said.
Daniel J. Mitchell, a senior fellow at the libertarian Cato Institute and an opponent of government intervention in the private sector, applauded Obama's moves on executive compensation.
"President Obama's proposal gets me nervous since it may lead to further meddling by government, but there is a silver lining," Mitchell said. "Bailouts are a major threat to the economy's long-run dynamism, so I want to discourage companies from sticking their snouts in the public trough." Sen. Bernie Sanders, I-Vt., said the new rules are a step in the right direction.
"We have to go further," Sanders said in a statement. "People are furious that a handful of Wall Street executives — through their greed and their irresponsibility and probably through illegal behavior — have plunged us into a very deep recession."