The AIG Bonuses, Part 6:
The House considers a new bill

1 Apr 2009 in Regulatory Economics, Regulatory Policy, Legislation

We have blogged six times now on the AIG bonus controversy (see Part 1, Part 2, Part 3, Part 4, Part 5, and Part 6). Most recently, we pointed out that bonus recipients who return their bonuses face significant tax liabilities unless Congress or the IRS (if it is able) acts to change the rules, This seems unlikely.

Today we learned that the House of Representatives is fast-tracking a second bill, H.R. 1664. How does it differ from H.R. 1586, the confiscatory tax bill that the House passed a week ago? What are the bill's incentive effects?

UPDATE: The House passed H.R. 1664 by a vote of 247-171 on April 1, 2009.

H.R. 1664 amends Section 111 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5221) to do the following things:

• Retroactively change the statutory construction of the Emergency Economic Stabilization Act of 2008. Section (1)(b) inserts new language into the 2008 law. This language has the effect of making illegal certain employment contracts that were legal last year.
• Impair the performance of certain existing employee contracts by making it illegal for covered employers to honor them. Section (1)(a) of the bill bans any "compensation payment, other than a longevity bonus or a payment in the form of restricted stock, to any executive or employee under any existing compensation arrangement..." (emphasis added).
• Prohibit any future contracts from including bonuses not based on performance.
• Gives the Treasury Department the authority to decide how much compensation is "unreasonable and excessive." Section (1)(a) directs Treasury to establish these rules within 30 days of enactment.
• Gives the Treasury Department the authority to define "performance-based standards." Only bonuses that adhere to these performance-based standards would be permitted.
• Requires covered employers to report annually on the number of employees receiving total compensation in several categories. These reports would be uploaded to the Internet by the Treasury Department. Names would not have to be included in these reports.
• Removes the $5 billion threshold for cumulative federal capital infusions in H.R. 1586, and subjects all recipients of capital infusions to these requirements. Firms that do business with covered firms would not be covered.

Retroactivity remains a potential constitutional problem, as do provisions in he bill that impair the performance of existing legal contracts.

Aside from these legal issues, H.R. 1664 has predictable consequences, including:

• There is no threshold for federal capital infusions low enough to exempt a firm from being a "covered" firm. Under H.R. 1586, company managers would have an incentive not to accept more than $5 billion in capital infusions. Under H.R. 1664, federal control of executive compensation begins after receipt of the first dollar.
• Performance-based bonuses may disappear. The legal risks of entering into contracts that include performance criteria may be too great for covered firms and employees alike. Compensation that used to be delivered in the form of bonuses will be incorporated into salaries to eliminate this risk.
• Senior employees who continue to work (or begin working now) for covered firms can expect to have their identities and total compensation disclosed for the purpose of public ridicule. Although the bill expressly states that covered firms need not disclose names, recent experience indicates that names and total compensation will be disclosed inevitably, probably by Members of Congress.
• Many highly skilled employees will choose to work elsewhere rather than be subjected to these provisions. Covered firms will experience significant turnover among existing employees and difficulties recruiting quality candidates.

Mr. GRAYSON (for himself, Mr. HIMES, Ms. LEE of California, Mr. WELCH, Mr. ELLISON, Mr. ORTIZ, Mr. PERRIELLO, Ms. JACKSON-LEE of Texas, and Mr. CONNOLLY of Virginia) introduced the following bill; which was referred to the Committee on Financial Services

Additional sponsor: Ms. FUDGE

Reported with an amendment, committed to the Committee of the Whole House on the State of the Union, and ordered to be printed

To amend the executive compensation provisions of the Emergency Economic Stabilization Act of 2008 to prohibit unreasonable and excessive compensation and compensation not based on performance standards.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. PROHIBITION ON CERTAIN COMPENSATION.

(a) Prohibition on Certain Compensation Not Based on Performance Standards- Section 111 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5221) is amended by redesignating subsections (e) through (h) as subsections (f) through (i), and inserting after subsection (d) the following:

`(e) Prohibition on Certain Compensation Not Based on Performance Standards-

`(1) PROHIBITION- No financial institution that has received or receives a direct capital investment under the Troubled Assets Relief Program under this title, or with respect to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a Federal home loan bank, under the amendments made by section 1117 of the Housing and Economic Recovery Act of 2008, may, while that capital investment remains outstanding, make a compensation payment, other than a longevity bonus or a payment in the form of restricted stock, to any executive or employee under any existing compensation arrangement, or enter into a new compensation payment arrangement, if such compensation payment or compensation payment arrangement--

`(A) provides for compensation that is unreasonable or excessive, as defined in standards established by the Secretary, in consultation with the Chairperson of the Congressional Oversight Panel established under section 125, in accordance with paragraph (2); or

`(B) includes any bonus or other supplemental payment that is not directly based on performance-based measures set forth in standards established by the Secretary in accordance with paragraph (2).

Provided that, nothing in this paragraph applies to an institution that did business with a recipient of a direct capital investment under the TARP.

`(2) STANDARDS- Not later than 30 days after the date of enactment of this subsection, the Secretary, with the approval of the agencies that are members of the Federal Financial Institutions Examination Council, and in consultation with the Chairperson of the Congressional Oversight Panel established under section 125, shall establish the following:

`(A) UNREASONABLE AND EXCESSIVE COMPENSATION STANDARDS- Standards that define `unreasonable or excessive' for purposes of subparagraph (1)(A).

`(B) PERFORMANCE-BASED STANDARDS- Standards for performance-based measures that a financial institution must apply when determining whether it may provide a bonus or retention payment under paragraph (1)(B). Such performance measures shall include--

`(i) the stability of the financial institution and its ability to repay or begin repaying the United States for any capital investment received under this title;

`(ii) the performance of the individual executive or employee to whom the payment relates;

`(iii) adherence by executives and employees to appropriate risk management requirements; and

`(iv) other standards which provide greater accountability to shareholders and taxpayers.

`(3) REPORTING REQUIREMENT-

`(A) IN GENERAL- Any financial institution that is subject to the requirements of paragraph (1) shall, not later than 90 days after the date of enactment of this subsection and annually on March 31 each year thereafter, transmit to the Secretary, who shall make a report which states how many persons (officers, directors, and employees) received or will receive total compensation in that fiscal year in each of the following amounts:

`(i) over $500,000;
`(ii) over $1,000,000;
`(iii) over $2,000,000;
`(iv) over $3,000,000; and
`(v) over $5,000,000.

The report shall distinguish amounts the institution considers to be a bonus and the reason for such distinction. The name or identity of persons receiving compensation in such amounts shall not be required in such reports. The Secretary shall make such reports available on the Internet. Any financial institution subject to this paragraph shall issue a retrospective annual report for 2008 and both a prospective and retrospective annual report for each subsequent calendar year until such institution ceases to be subject to this paragraph.

`(B) TOTAL COMPENSATION DEFINED- For purposes of this paragraph, the term `total compensation' includes all cash payments (including without limitation salary, bonus, retention payments), all transfers of property, stock options, sales of stock, and all contributions by the company (or its affiliates) for that person's benefit.'.

(b) Revision to Rule of Construction- Section 111(b)(3)(D)(iii) of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5221(b)(3)(D)(iii)) is amended by inserting before the period the following: `, except that an entity subject to subsection (e) may not, while a capital investment described in that subsection remains outstanding, pay a bonus or other supplemental payment that is otherwise prohibited by clause (i) without regard to when the arrangement to pay such a bonus was entered into'.

Union Calendar No. 28

To amend the executive compensation provisions of the Emergency Economic Stabilization Act of 2008 to prohibit unreasonable and excessive compensation and compensation not based on performance standards.

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