Obama limits exec pay for firms in bailout

WASHINGTON - In announcing new executive pay limits Wednesday, President Obama is trying to hold the financial industry accountable to taxpayers while aiming to change an entrenched corporate culture that endorses outsize bonuses and perks that often bear little relationship to corporate performance.

Obama also needs to deflect a growing populist outrage over sky-high pay among the banks and other companies now on the public dole. His announcement comes just days before the administration is expected to unveil a new strategy -- and possibly request more money -- to guarantee or buy outright hundreds of billions of dollars in bad assets held by banks.

The new rules, which take effect immediately and do not require Congressional approval, would set a $500,000 limit on cash compensation for the most senior executives, curtail severance pay when top executives leave a company, restrict cashing in on stock incentives until government assistance is repaid and prod corporate boards to closely scrutinize luxury perquisites.

The plan's effectiveness may not be known for years, however. Past administrations have also been critical of excessive pay, but corporate executives have found ways around limits, often hiring consultants to create new forms of compensation.

Even the new rules allow some leeway. While restricting when stock incentives can be cashed in, they don't place limits on the amount of stock options, which have become the biggest part of many executive compensation packages.

In addition, the toughest new rules apply only to large companies that receive "exceptional financial recovery assistance" or those seeking assistance to survive. They do not apply to the more than 350 institutions that have already received bailout funds -- including the Detroit automakers and such major Wall Street financial institutions as Citigroup and American International Group -- but only to those that seek aid under the next phase of the bailout program.

And healthier banks applying for government money from aid would be able to waive the rule if they publicly disclosed what they were doing and submit their executive pay policies to a nonbinding shareholder vote.

'Rewarded for failure'

Still, the rules represent the most comprehensive effort to curb compensation.

"This is America," Obama said, appearing with Treasury Secretary Timothy Geithner, the plan's architect. "We don't disparage wealth. We don't begrudge anybody for achieving success. And we believe that success should be rewarded. But what gets people upset -- and rightfully so -- are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers."

In 2007, the latest year that figures are available, the largest participants in the bailout program paid their chief executives an average compensation of $11 million, including salary, bonus and benefits. Of that amount, said a review by Equilar, an executive compensation firm, only about $844,000 is cash salary. Another $2.5 million in cash bonus, with the bulk -- $7.4 million -- in stock awards, and the remainer in benefits and perks.

If banks return to the government for more money, the new rules would require a deduction in pay, but not in stock awards, though these would be in the form of long-term incentives because of restrictions on when they could be cashed in.

The plan will most likely force companies to think twice before coming to Washington for a handout, and it is certain to nudge them to return taxpayer loans more quickly.

On Wednesday, for instance, David Viniar, the chief financial officer of Goldman Sachs, which received $10 billion from the Treasury Department, said his firm wanted to repay the government as quickly as feasible to "be under less scrutiny and under less pressure," Bloomberg News reported.

The Financial Services Roundtable, which lobbies on behalf of financial institutions, said that giving shareholders a vote on pay could discourage companies from seeking help.

The rules will not prohibit a lower-level executive, such as a stock trader or investment banker, from continuing to receive tens of millions of dollars in pay. Officials also emphasized that several of the proposals would not be make final until after public comments had been considered.

Both parties laud the move

Still, investor groups, union leaders and lawmakers in both parties embraced the proposal.

Minnesota's U.S. senator, Democrat Amy Klobuchar, praised the limit. "You can make what you want but if you're going to start taking government money -- taxpayer money that's supposed to be going out to push for car loans and small businesses -- and then giving yourself tens of millions of dollars in bonuses, that's just wrong," she said.

"The [Bush] administration clearly didn't put any rules in place," she added.

Rep. John Boehner of Ohio, the Republican minority leader, said that limits on pay would be more equitable for rank-and-file taxpayers. "If anyone is looking for the taxpayer to help bail their company out," he said, "these types of executive pay caps are appropriate."

Officials said that the larger goal of the proposal was to make the boards of major corporations award pay packages more consistent with corporate earnings.

Staff writer Mike Kaszuba and the Los Angeles Times contributed to this report.