Treasury and Federal Reserve Unveil Rules to Curb Executive Compensation

Strategic Insights -

The U.S. Treasury and Federal Reserve announced a set of rules to reduce excessive executive compensation at firms that received federal bailout funds, aiming to alleviate concerns over executive pay at companies reliant on taxpayer support. The Treasury Department required seven firms, including Bank of America and Citigroup, to slash the compensation of their 175 highest-paid employees by 50%, with an average cash salary reduction of 90%. Kenneth Feinberg, the special master appointed to handle compensation issues, stated that the goal is to align executive interests with the long-term financial health of the firms. The rules, part of the government's $700 billion financial bailout package, aim to curb "excessive pay" and promote risk-taking that benefits the company and society as a whole.

Key Takeaways:

  • The Treasury Department and Federal Reserve unveiled rules to reduce executive compensation at seven firms that received $250 billion in bailout funds under the Troubled Assets Relief Program (TARP).
  • The rules require a 50% reduction in total compensation for 175 high-paid employees at these firms, with an average cash salary reduction of 90%.
  • Kenneth Feinberg, the special master appointed to handle compensation issues, stated that the goal is to align executive interests with the long-term financial health of the firms.
  • The rules will apply to firms such as Bank of America, Citigroup, and General Motors, which received significant bailout funds to stay afloat.
  • Other companies, including Goldman Sachs and JPMorgan Chase, are not affected by the plan, as they have repaid the bailout money.
  • The Federal Reserve issued a proposal to curb incentive compensation at banks to ensure they do not "undermine the safety and soundness" of their organizations.
  • The proposal includes supervisory initiatives to review compensation practices at banks, including reviews of regional and community banking organizations.

Statistics:

  • Ten billion dollars: the total amount in compensation that executives at seven firms have been required to cut under the Treasury Department's rules.
  • 50%: the average reduction in total compensation for 175 high-paid employees at these firms.
  • 90%: the average cash salary reduction for affected executives.
  • $250 billion: the total amount in bailout funds received by the seven firms under the Troubled Assets Relief Program (TARP).
  • 700 billion dollars: the total amount of the government's financial bailout package that includes the compensation rules.
  • $700 billion: the total amount of bailout money used to support the financial sector under the Troubled Assets Relief Program (TARP).

Sources:

  • Xinhua (Washington, DC, October 22, 2009)
  • "U.S. Treasury Unveils Rules to Cut Executive Pay," Xinhua News Agency
  • The Wall Street Journal (October 22, 2009)
  • The White House (October 22, 2009)
  • Federal Reserve (October 22, 2009)
  • Congressional legislation on compensation (no specific date provided)