U.S. Treasury’s pay czar said on Friday that cash payments of chief executive officers (CEOs) at three firms will not increase this year from the 2010 levels. The reason being, these firms are still under the Troubled Asset Relief Program (TARP) for not clearing their bailout money. However, the mix of stock salary and long-term restricted stock was not fixed.
This could be viewed as one of the safest ways to protect taxpayers’ money circulating in these institutions.
Companies Under Consideration
The latest pay restrictions will apply to insurance giant American International Group (AIG), troubled automaker General Motors (GM) and its former financing arm, Ally Financial Inc., previously known as GMAC Inc.
It was a close call for the CEO of another major bailed-out company, Chrysler Group. The company would also have come under the pay restrictions had it not been acquired by Italy’s Fiat S.P.A. Now, Chrysler’s CEO will be directly compensated by Fiat.
Extent of Cash Pay Limit
According to the Treasury, cash compensation levels for the top 25 executives at these firms will decrease about 18% in 2011. Also, the total compensation will drop 1.3% from the prior-year level.
Without identifying the executives by name,the acting pay czar Patricia Geoghegan, who took over for Kenneth Feinberg in September 2010, said that top-paid executives at AIG, Ally Financial and GM will receive $10.5 million, $9.5 million and $9 million, respectively.
Why Restrict?
Cash bonuses are very risky in the short term, considering market volatility. If a company incurs huge losses caused by executives and decides to penalize them, cash bonuses will not be immediately recoverable.
We have already seen how the risk-taking attitude of many executives led to the latest financial crisis. As executives received most of their awards in the form of cash, they did not bother addressing the possible aftermath of their risk-taking.
What About Other Biggies?
In order to restrain excessive risk-taking, regulators were compelled to award the executives at mega-banks with half or more of their pay in stock or through deferred compensations following a provision in the Dodd-Frank Act, signed into law on July 21, 2010. The Act gives regulators the authority to prohibit any bonus plan of financial institutions (with more than $1 billion in assets) that encourages out-of-place risks.
Following the financial crisis, most financial companies have voluntarily taken the initiative to reduce their amount of cash bonuses. Now, the compulsion to reduce cash bonus will probably help in restricting another financial crisis.
For a Safer Future
It is our belief that the restriction on pay structure, especially on cash pay, would provide more liquidity to the companies under consideration as majority of the awards to executives would not be in the form of cash advances. However, less cash payment could make these companies less competitive in retaining talent.
Also, compensation in the form of stock or deferred payment will force executives to take care about their company’s long-term prospects.
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