Pay for Performance Act and End the Greed Act
On April 1st, the House passed the Pay for Performance Act, H.R. 1664, which contains provisions tying pay to performance at companies receiving TARP, including prohibiting payment of unreasonable or excessive compensation and non-performance based bonuses for companies while direct capital investments from the TARP or HERA (for Freddie and Fannie) remain outstanding. The House also considered the End the GREED Act, H.R. 1575, which would have given the Attorney General the ability to recover the most egregious bonuses by entities that receive or have received more than $5 billion in direct capital investment by the U.S. under TARP or HERA by filing a civil action in federal court. While this bill received a majority of votes, it failed to receive the two-thirds necessary to pass under suspension of the rules.
The American International Group (AIG) bonuses have exposed the extraordinary abuses of the public trust by companies rewarding employees with excessive compensation, even while taxpayers are now on the hook for billions to address the consequences of these companies’ unchecked risk-taking.
These bills are needed to protect taxpayers’ money, ensure that failure is not rewarded with bonuses, and hold companies -- including AIG and other companies receiving billions in taxpayer dollars -- accountable for the bonuses that were paid to their executives.
No taxpayer funds should be used to pay bonuses or other unjustified compensation to any executive whose irresponsible risk-taking brought our financial system to the brink of collapse.
After receiving more than $170 billion in taxpayer funds, AIG paid $165 million in retention payments to executives – most of whom have mismanaged their company into near bankruptcy.
Two weeks ago, the House passed a tax bill to recover taxpayers’ dollars from AIG and other companies receiving billions in TARP funds. Soon after, a number of AIG executive returned their bonuses – including 15 of the top 20 AIG bonus recipients -- totaling $50 million, according to the New York attorney general.
The AIG bonuses underscore the urgency and need for overall financial regulatory reform so we don’t find ourselves in this position again. Congress and the Administration are working toward that end.
Pay for Performance Act – Financial Services Bill (H.R. 1664, Reps. Grayson and Himes)
To protect taxpayers’ money, the bill:
- Restricts bonuses of highly-compensated employees, as adopted in the American Recovery and Reinvestment Act, while a direct capital investment under TARP remains outstanding, regardless of when the arrangement to pay such bonus was entered into.
- Adds new compensation/bonus restrictions for financial institutions that receive or have received a direct capital investment by the Treasury Department under the Troubled Asset Relief Program or for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. (Rep. Cardoza will offer an amendment to limit these provisions to companies receiving at least $250 million.) While such a capital investment is outstanding, and regardless of when a compensation payment arrangement was entered into, recipients of a direct capital investment from the Treasury would be prohibited from:
- Paying any executive or employee any compensation that is “unreasonable or excessive;”
- Paying any bonus or other supplemental payment that is not directly based on performance-based standards.
- Entering into new contracts for compensation that are “unreasonable or excessive or not performance-based.
- Requires the Treasury Secretary in defining unreasonable or excessive compensation and establishing performance-based measures for compensation to consult with the Chairperson of the Congressional Oversight Panel and obtain approval of the agencies that are members of the Federal Financial Institutions Examination Council.
- These restrictions would be lifted once a company has repaid the government.
- These restrictions will not affect companies participating in the Obama Administration’s public-private partnership to buy toxic assets, the foreclosure mitigation initiatives, or those receiving funding through Term Asset-Backed Securities Loan Facility.
- Finally, the bill would require a financial institution that is subject to the new compensation requirements to submit an annual report to the Treasury Secretary stating how many executives and employees received or will receive total compensation above specified dollar amounts during the fiscal year.
End the Government Reimbursement of Excessive Executive Disbursements (“End the GREED”) Act -- Judiciary Bill (H.R. 1575)
- This narrowly crafted measure gives the Attorney General the ability to recover the most egregious bonuses by entities that receive or have received more than $5 billion in direct capital investment by the U.S. under TARP or HERA by filing a civil action in federal court.
- The Attorney General could only do so where the entity was insolvent and paid excessive compensation to an officer, director, or employee who provided less than reasonably equivalent value in exchange. This applies to bonuses paid after September 1, 2008.
- Every state in the U.S. has some form of similar fraudulent transfer statute.
- This legislation takes another critical step in executive compensation by:
- Reaching bonuses made at the end of 2008. For example, more than $3 billion in bonuses were paid by Merrill Lynch late last year.
- Providing a mechanism for recovering bonuses paid to non-citizens who would be unaffected by the tax provision Congress recently passed. New York Attorney General Cuomo reported that only 47% of AIG bonuses were paid to U.S. citizens.
- Authorizes the Attorney General, after consultation with the Treasury Secretary, to subpoena witnesses and to obtain necessary information relevant to the bonuses.
- Prominent constitutional scholars have confirmed that the bill is constitutional, including:
Prof. Laurence Tribe (Harvard) – “Having carefully reviewed the text of the bill, I believe it stands on solid constitutional ground.”
Prof. Doug Baird (Univ of Chicago) – “Because H.R. 1575 largely replicates rights that the United States already possesses under state laws, there seems to be little doubt that Congress has the power to enact it.”
Prof. Michael Gearhardt (UNC) – “I believe that The End GREED Act is unquestionably constitutional. Each of the powers deployed to enact this bill is plenary, and these powers – individually and collectively – provide an unusually strong, unassailable constitutional foundation for The End GREED Act.”
Prof. Ken Klee (UCLA) – “It is my view as a professor of law that the fraudulent transfer provisions of the Manager’s amendment to H.R. 1575 are constitutional on their face and as applied to avoid payments of excessive compensation made under contracts entered into before the date of enactment.”