The top five corporate executives at banks participating in the government’s bailout program could conceivably have to give back their bonuses, according to a recent article in The Deal. That would happen if the benchmarks used to grant the bonuses were based on “materially inaccurate financial statements” or other inaccurate performance data. In these cases, the company boards would be forced to recover the bonuses.
These measures are even tougher than similar rules put forth under Sarbanes-Oxley in 2002. At that time, boards had to prove that CEOs or CFOs intentionally mislead the company. But with the new regulations, financial statements just have to be wrong to trigger a claw back on bonuses.
Another new restriction prohibits banks who are receiving Treasury money from offering golden parachutes to their top five executives, for as long as the institution is taking federal funds. This could limit a bank’s ability to attract top talent, until they buy out the Treasury’s stake in their business.
Moving forward, executives may opt for private equity jobs and stay away from highly regulated banks, says Temple University Business School professor Steven Balsam. It’s also becoming harder for boards to justify stratospheric compensation plans to shareholders, given the current political environment, leading to further cuts in CEO pay.
Expect more restrictions in the future. House Financial Services Committee Chairman Barney Frank (D-Mass.) plans to introduce new CEO pay legislation in 2009. A stronger, Democratic-controlled Congress may take major steps to clamp down on CEO pay excesses, using the bailout regulations as a guideline.