Pay Limit on TARP Recipients

The chairman of the House Oversight and Government Reform panel said on Wednesday that Congress will soon investigate executive compensation at companies that received significant amount of taxpayer funds.

The U.S. Treasury's pay czar, Kenneth Feinberg is in charge of deciding compensation packages for the highest-paid employees at all the firms that received bailout money. For seven firms, the situation is critical as these firms received substantial support from the Troubled Asset Relief Program (TARP).

The seven firms whose compensation plans will be scrutinized are American International Group (AIG - Analyst Report), Citigroup (C - Analyst Report), Bank of America (BAC - Analyst Report), Chrysler Financial, Chrysler Group LLC, General Motors and GMAC Inc (GJM).

The U.S. Treasury Department is pressing bailed out insurer AIG to reduce $198 million in scheduled retention payments after the government missed the opportunity to defend against controversial bonuses to AIG employees last year. However, AIG is currently trying to repay its $85 billion loan to the government by selling off some of its assets.

In the course of the review of the aptness of the richest pay packages, the pay czar is planning to cut the annual cash salaries for many of the top executives whose firms accepted bailout funds.

As an alternative to paying large cash salaries, the pay czar is planning to shift a large portion of an employee's annual salary to stock that cannot be accessed for several years. The percentage of salary to be diverted to stock is not yet clear, but it could be above 50% in some cases.

The pay czar has already used his concept with Robert Benmosche, the new chief executive of American International Group. Benmosche's salary was broken into two parts. Benmosche will annually receive $3 million cash salary and $4 million in AIG stock that cannot be accessed for five years.

Some large financial firms that have already repaid government funds are JPMorgan Chase & Company (JPM - Analyst Report), Morgan Stanley (MS - Analyst Report), Bank of New York Mellon Corporation (BK - Analyst Report), Goldman Sachs (GS - Analyst Report), U.S. Bancorp (USB - Analyst Report), American Express Company (AXP - Analyst Report), BB&T Corporation (BBT - Analyst Report) and State Street Corporation (STT - Analyst Report). However, for many other firms the repayment of TARP money is unlikely for a long time as they face very difficult situations.

We think that the full repayment of government money will enable bailed-out firms to protect their executive compensation packages. Restrictions on pay rules as a result of using government money are a major competitive disadvantage for these firms in retaining talented employees.

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