Obama ties executive pay caps to bail-out funds

The compensation packages received by high-level executives, irrespective of performance, have come under scrutiny over the past several months as continued writedowns and significant losses from subprime assets have sent the banking sector into a tailspin. Accompanied by Secretary of the Treasury Timothy Geithner, Obama stated that Americans are upset with "executives being rewarded for failure".

The new guidelines do not apply to banks who have received funding via a "generally available capital access programme", such as the Capital Purchase Program, which have the same terms for all recipients in addition to limits on bail-out amounts and specified returns for taxpayers.

Banks that are subject to the new requirements are those that have received more funding than allowed under these standard programmes, and which have specific negotiated agreements with the Treasury on repayment terms - for example, American International Group (AIG), Citigroup and Bank of America.

If executives at banks that have received exceptional assistance are compensated above the $500,000 limit, payment will be in the form of stock that is not redeemable until taxpayers have been reimbursed for their assistance, according to the new plan.

Under the new guidelines, the top 25 executives at firms receiving exceptional assistance will be required to pay back bonuses and incentive compensation if the company has misstated its financials. Previously, this clawback provision had been limited to the top five senior executives.

The plan also strengthened the ban on "golden parachutes" for senior executives and called for senior executive compensation plans be included in shareholder resolutions.

In September, the US government cobbled together a rescue package for AIG that provided a $85 billion bridge loan in exchange for taking a 79.9% stake in the troubled insurer. The government also agreed to borrow up to $37.8 billion of its investment-grade fixed-income securities in return for cash collateral.

Citigroup has received $20 billion in Troubled Assets Relief Program funds in addition to $25 billion from the CPP, while Bank of America received a $20 billion capital injection and guarantees on $118 billion of debt in return for carrying through its acquisition of Merrill Lynch.

See also: Executive pay reviewed at Barclays, UBS and Goldman
Deutsche CEO and UBS chairman decline bonuses
Bankers' incentives blamed for crisis