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Bringing salaries down to earth

Executives don't like limits; most others do

By Todd Wallack and Erin Ailworth
Globe Staff / February 5, 2009
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Local taxpayers yesterday applauded President Obama's $500,000 planned cap on executive pay. Unless they happened to be an executive.

"It's about time, especially in these economic times when people can't pay their bills," said Mark Nolan, a captain with Boston Harbor Cruises.

The new rules would limit pay for executives at companies that accept government bailout money. They also clamp down in other ways, such as by cutting severance packages; requiring boards to create corporate spending policies for corporate jets, holiday parties, and other luxury expenses; and allowing firms to recoup pay from executives who commit fraud.

Mike Long, who drives a cab for Bay State Taxi, said Obama's plan doesn't go far enough - Long would set a $200,000 pay limit. "It's absolutely criminal that these guys are getting paid that much anyway," he said. "The country is in economic crisis, and these guys continue to reap massive benefits."

Janet Proctor, 67, a retired social worker who lives in Framingham, said, "To think about anyone making millions for bonuses just seems ridiculous."

But some local business leaders attending a Boston College Chief Executives' Club luncheon yesterday said limiting pay will unfairly penalize executives who are doing good work in tough times, and even discourage some from staying on the job.

"I think realistically we understand there will be some limitations. I would hope as these are crafted, they'll be reasonable," said Chad Gifford, the former FleetBoston chief executive who serves on the Bank of America Corp. board. But executive pay should depend on how well a company and its shareholders do, Gifford said, not an arbitrary limit.

"I think for somebody who is creating, in my opinion, tremendous value, to have a straitjacket like that . . . it is probably too low," he said of the $500,000 ceiling.

Robert Smyth, Massachusetts president for Citizens Bank, which is not eligible to get fed eral aid because it is owned by the Royal Bank of Scotland, said the new standards warrant more discussion.

"You don't want to stifle incentives," Smyth said. "You have to be careful of going overboard, particularly in these times."

William Morrissey, an executive vice president at Central Bank in Somerville, took a slightly different view. "It's only reasonable to put a cap on CEO salaries" for companies that seek government assistance, Morrissey said.

"Everyone should feel a little pain in these periods."

John Fish, chief executive of Suffolk Construction Co., said companies can best limit compensation on their own. "Although the numbers sound outrageous, people have to look at the context and how people are doing," Fish said.

Fish also said some of the largest pay packages that made headlines over the past few years were part of a bygone era.

"We're in a whole new era of business," he said. "The marketplace itself will put pressure on the compensation system."

Robert Reynolds, chief executive of Putnam Investments, a Boston mutual fund company, said fixing the financial industry will take talented people who are paid well for their efforts. "The best people will go to other places to work" if their compensation is limited, Reynolds said. Still, he added, "I can see why you'd want to get rid of abuses."

But some compensation specialists said they doubt whether Obama's plan will have its intended effect - forcing companies to do away with executive excesses.

For instance, the rules won't affect American International Group, Bank of America, Citibank, State Street Corp., and other major financial institutions that have received billions of dollars in taxpayer money, unless they seek more bailout funds. In a press release yesterday, the Treasury Department said the new rules are not retroactive.

"Until companies start receiving money under these new arrangements, it's not going to have any impact at all," said Paul Hodgson, senior research associate at the Corporate Library in Portland, Maine, a firm that tracks corporate governance.

In addition, financial executives will still be entitled to receive millions of dollars a year in restricted stock, stock options, and other long-term incentive awards - provided they don't cash in the awards until after the institutions have repaid the government bailout money. And most of the harshest restrictions only apply to companies that receive aid under certain programs.

Some noted that past efforts to crack down on pay have backfired. In 1993, Congress tried to cap salaries at $1 million by voting to make companies pay taxes on pay above that level. But companies increased other forms of executive pay, including stock options and stock grants, which often turned out to be far more lucrative than the salaries and may have helped drive up executive compensation overall.

"Any time you set any arbitrary limit, either people leave or they evade it, and neither is helpful," said Charles Elson, chair of the of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Elson said it would be better to encourage companies to establish strong, independent boards of directors that can negotiate more reasonable pay packages.

In detailing his plan yesterday, Obama said, "For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste - it's a bad strategy - and I will not tolerate it as president.

"We're going to be demanding some restraint in exchange for federal aid - so that when firms seek new federal dollars, we won't find them up to the same old tricks."

Representative Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, acknowledged Obama's proposal has limits, but said it's more than anything the Bush administration did to monitor compensation.

At South Station, John Ford, a 28-year-old Boston resident, called the restrictions a necessary evil. "I am completely against the government putting its hand in anything," said Ford. "On the other hand, profligate spending is a detriment."

But Ron Ratney, a 77-year-old retired federal worker who was walking his dog Ella near the Boston Harbor Hotel, doubted whether government intervention will ultimately win out over greed. "People will probably figure out a way around it," he said.

Todd Wallack can be reached at twallack@globe.com.; Erin Ailworth at eailworth@globe.com.

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