- The Washington Times - Thursday, August 20, 2009

Some banks awarded federal bailout money have complained that Treasury Department rules limiting executive pay are too restrictive, inconsistent and have caused top employees to quit, says a new report by a federal government watchdog.

An audit released Wednesday by the Special Inspector General for the Troubled Asset Relief Program (TARP) also says that some bailout recipients have “expressed frustration” with changing compensation guidance and rules since the program was signed into law in October by President George W. Bush.

The inspector general’s office, headed by Neil M. Barofsky, offered kudos in the report to the Obama administration for several proposals designed to increase oversight and transparency for the compensation of executives at financial institutions that receive TARP money. Among those proposals are “say-on-pay” rules that call for giving shareholders a say on pay and bonuses for their company’s top officials.

But the report, which was designed to address efforts by TARP recipients to comply with executive compensation requirements, made no recommendations to the administration and Treasury Department.

As of early July, Treasury has disbursed about $361 billion of TARP money to more than 650 financial institutions.

The report says that TARP recipients have scrambled to keep up with evolving regulations on executive compensation since the program’s inception.

The Treasury Department issued compensation rules Oct. 20 that applied to banks’ five top executives. The rules, which were amended in January, were designed to prevent compensation from encouraging excessive risk-taking, allowed companies to take back bonuses for executives who issued misleading statements, and limited “golden parachute” payments to executives when they left a company.

Then in February, additional executive pay restrictions included in the $787 billion economic stimulus package superseded Treasury’s previous guidance, adding to the confusion.

The Treasury Department, which oversees the TARP program, issued an updated and consolidated list of compensation requirements June 15. But by then some banks said they had hired outside consultants just to monitor the changing compensation rules.

Two major banks surveyed in the inspector general’s report said they have lost employees to foreign and domestic competitors who are not under TARP compensation restrictions. One of those banks said it had lost five executives to other firms as a direct result of compensation restrictions.

Other banks reported they were having trouble recruiting new employees or were experiencing higher levels of early retirements.

The audit was based on responses from survey letters sent in February to 364 banks and other institutions that had completed TARP funding agreements through January.

The Treasury Department concurred with the report. But it countered the banks’ complaints by noting that Mr. Barofsky’s report was conducted six months ago, saying that the “timing no doubt heavily influenced the views of the survey respondents.”

Executive compensation rules could change yet again later this year. The House last month passed another bill aimed at curbing Wall Street pay packages. The bill, which has yet to receive a vote in the Senate, would allow federal regulators to cap pay incentives that they deem would encourage bankers and other financial executives to take risks that could threaten the economy or their company.

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