Giving a Kid the Candy Store: Obama Promises Stricter Executive Compensation Rules

In an effort to muster public support for more Wall Street giveaways... uh, bailouts... Barack Obama and Treasury Secretary Tim Geithner today announced regulations on executive compensation for all banks that will receive federal funds under TARP II. However, the rules specifically exempt restricted stock from the limits.

While this cap may bring down some of the exorbitant salaries in a way, the fact is that most executive compensation isn't made through salary alone. Rather, restricted stock is already precisely the way most companies transfer wealth to executives.

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To give an example, let's say bank executive X's current compensation package includes a $1 million salary, bonuses that are typically in the range of $2 - $10 million, and restricted stock (X already owns 500,000 shares). This year, however X's bank takes on capital from the government under TARP II. So, X faces a salary cut of 50%, plus he can't take a bonus this year because of public outrage (not because he ran the bank into insolvency). But there are no restrictions on how much restricted stock he can receive.

Essentially this means that Obama is forcing the bank execs to defer their compensation for a short or intermediate time frame. Bank board of directors will authorize outrageous sums of restricted stock to make up for the loss in other forms of compensation.

And since Obama is thus far refusing to even consider nationalizing the banks, Obama is effectively telling the bank execs... wink, wink... that he is going to preserve the banks' stocks (and thus executive and shareholder stakes in the company) by not insisting on any reasonable terms in exchange for government funds.

Obama is saying: don't take big salaries. Take down huge chunks of stock at these low prices, and, if you play ball, I will make sure your bank still exists in 2, 5, 10 years and you will make fortunes.

It's like cutting the allowance of a kid for a year because he behaved badly, but giving him enough candy to tide him over for that period and promising that, at the end, he will own the candy story.