Compensation limits and their effect on executive compensation management

by on June 30, 2009 · 0 Comment POSTED IN: HR Info Center

Government regulation of executive compensation management is enforced but not well defined

Government regulation of executive compensation management is to prohibit excessive risk. Well, they’ve put in numbers now. You can’t have over a certain percentage on the bonus. It can’t be tied to taking excessive risk and all that kind of stuff.

Well, the problem is, again, 162(m) encouraged them to do this. And as a result, now they want to come back and say don’t do it. But there’s no definition of what that really is. And when you look at equity, what’s to prohibit them from granting options under some other value and getting around the cap on equity amounts.

So what could happen down the road as things change and the economy improves and all that, what are they going to say when, you know, “Ken Lewis from Bank of America makes $125 million in one year because the equity amounts have gone up.” What are they going to say? Is that going to be another public outcry?

TARP and executive compensation management.
And as the government continues to move in this, we’ll have more issues that’ll just create more issues that’ll create more issues because we have all these inconsistencies in public policy right now.

When I come back to HHS, the 162(m) cap did not work. The HHS and DCAA, they couldn’t find a definition for reasonable comp. So in all their agencies that they fund or companies that they fund, all they did was say, “We’re not reimbursing you for any comp above this limit.” And they just set that an annual limit.

And that’s worked well for them because they just say, “We’re not paying for any executive comp above that threshold. That’s fine. You can continue to pay these executives. We’re just not reimbursing you for their cost.”

The IRS and definitions in executive compensation management
And, you know, the IRS can’t define reasonable comp. So here we are trying to do it again. While we do have some level of transparency that provides for comparability, it’s still not going to be an easy task.

And again, you know, you guys have all heard this, why we’ve been talking about it because we have these taxpayer funded programs. And people don’t want to see the million dollar bonuses to an organization that’s, you know, received taxpayer funding.

The snap Congress had to impose 90% tax on the AIG bonuses, I assume that everybody saw the executive response to that in the New York Times. That was just the snap reaction. And it felt good to them so they did it. And that’s always a dangerous situation.

Union concessions, obviously, you know, you’re seeing it in the auto industry. The executives take the hit. Unions take the hit. And then the current administration policies, obviously, they’re going after this issue. They think it’s excessive. And anytime they have a chance to have a say, they’re going to take it.

Edited remarks from the Rapid Learning Institute webinar: “Executive Compensation Trends: New Benchmarks & Changing Regulations” by Edward Rataj and Kevin Nussbaum

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