President Barack Obama on Wednesday imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money, saying Americans are upset with "executives being rewarded for failure."...
The pay cap would apply to all institutions that have negotiated agreements with the Treasury Department for "exceptional assistance." Those would include AIG, Bank of America and Citi.
Firms that want to pay executives above the $500,000 threshold would have to use stock that could not be sold or liquidated until they pay back the government funds.
I don't get too worked up about this one way or another. Once the government is a part owner of these companies, it is perfectly reasonable to expect them to dabble with things like compensation policy, and no surprise that focus of such dabbling would fall on whatever particular hobby horses the party in power seem to obsess about. Which is reason #4097 why government shouldn't be bailing these guys out.
In terms of executive compensation, options have fallen a bit out of favor as executives have sought more of a guaranteed payday, and changing accounting rules and more scrutiny have made that harder to do with options. The concern is, of course, stock prices can fall or even go to zero and that part of the compensation package would be worth zero. Executives are generally happy to take risks but only with other people's money (people who take risks with their own money are called entrepreneurs).
But in this case, most of these companies' stock is at what is likely to be the bottom, and each has the commitment of the government now not to let them go bankrupt, so the danger of stock values going to zero is, well, about zero. Would you take warrants in a company priced at the market trough and with the US government guaranteeing the floor beneath you? I can't think of a better time to get equity or option-based compensation, and so expect to see a lot of it in order to circumvent the $500,000 limit. And a lot of big paydays 5-7 years hence.