Bailout Could Restrict CEO Pay Packages Part I

With the massive bailout announced on Capital Hill, top executives at participating institutions are facing unprecedented federal limits on their pay packages. But this attempt to limit CEO pay could have far-reaching and unintended consequences, reports TheDeal.

One measure prohibits participating banks from deducting from taxable income more than $500,000 a year for base salaries paid to their top five executives. But this may only drive companies to find other ways of compensating CEOs.

For example, a similar change took place in 1993 when companies were prohibited from deducting more than $1 million in CEO pay. That led to a shift toward rewarding executives with stock options and bonuses for compensation. But a shift toward stock option payments may now be limited by recent Treasury regulations that bar pay packages that encourage “unnecessary and excessive risks that threaten the [firm’s] value.” And stock options are exactly the type of compensation that is most likely to encourage executives to take risks, says Temple University Business School professor Steven Balsam, in the article.

The changes could lead to more restrictive stocks grants to executives, such as a stock option that cannot be sold for an extended period of time, even years. Not being tied to short-term performance makes these restricted stock options less risky to the institution.

More to follow…

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