management blog

The draft of the US financial bail-out bill – or troubled asset relief programme (Tarp) – has supposedly been designed in such a way that failed executives will not be able to “dump their bad assets on the government, and then walk away with millions of dollars in bonuses”.

But will these curbs on executive pay work in practice? And could they/should they be deployed elsewhere?

To summarise as best as I can – this is dry, specialised stuff – the act says:

• Executives in financial institutions from which the government has directly purchased toxic assets in return for a “meaningful equity or debt position” must not be given incentives to take “unnecessary and excessive risks that threaten the value of the financial institution” while the state holds an equity or debt position in that organisation (page 31);
• During that period, these same financial institutions must have the power to claw back any bonus paid to a top-5 executive based on performance measures that later turn out to be materially inaccurate (page 31);
• During that period, there will be no “golden parachute” payments for top-5 executives at these institutions either (page 31);
• Meanwhile, no new “golden parachute” deals are allowed for senior executives at financial institutions from which the government has bought more than $300m of toxic assets through both direct purchases and auctions, and in which it took a meaningful equity or debt position that has not yet been fully unwound (page 32);
• These same institutions will lose some tax deductions if they pay their CEO, CFO or highest-paid employee more than $500,000 in a year (page 99-105).

Take a look at the text yourself and say whether you think it all sounds clear or plausible.