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January 29, 2013

Treasury Failed to Rein in Excessive Pay at Bailed-Out Companies, Report Finds

By John M. Jascob, J.D.

The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has found that the Treasury Department continues to approve excessive pay for top executives at companies that received exceptional bailout assistance under the TARP program. SIGTARP found that, in 2012, the decisions on executive pay made by the Office of the Special Master for TARP Executive Compensation (OSM) were largely driven by the pay proposals of the same companies that historically had proposed excessive pay. Created by Treasury to implement Congress's limitations on executive compensation for TARP recipients, OSM sets pay for the Top 25 employees at companies that received exceptional TARP bailout assistance. SIGTARP's findings came in a report issued on January 28 to Treasury Secretary Timothy Geithner under the authority of the Emergency Economic Stabilization Act of 2008.

Specifically, SIGTARP found that OSM approved pay packages of $3 million or more for 54% of the 69 Top 25 employees at American International Group, Inc., General Motors Corporation, and Ally Financial Inc. (formerly General Motors Acceptance Corporation, Inc.). SIGTARP reported that 23% of these top executives received Treasury-approved pay packages of $5 million or more and 30% received pay ranging from $3 million to $4.9 million. Moreover, Treasury seemed to have set a floor on executive pay at these firms, awarding 2012 total pay of at least $1 million for all but one person.

Although OSM has established guidelines aimed at curbing excessive pay, the report found that Treasury has made no meaningful reform to address SIGTARP's previous warning that Treasury lacked robust criteria, policies, and procedures to ensure those guidelines are met. As a result, companies exercised significant leverage on the Acting Special Master to roll back OSM's application of the guidelines. SIGTARP concluded that by not holding the line on large cash salaries and removing long-term, incentive-based stock as requested by the companies, OSM is effectively relinquishing some of OSM's authority to the companies, which have their own best interests in mind. In SIGTARP's view, OSM's job is to look out for the interests of taxpayers, which it cannot do if it continues to rely to a great extent on the companies' proposals and justifications without conducting its own independent analysis.

Given OSM's overriding goal to get the companies to repay TARP, as in prior years, the companies in 2012 had significant leverage over OSM by proposing and negotiating for excessive pay, warning that if OSM did not provide competitive pay packages, top executives would leave and go elsewhere. By proposing and negotiating for excessive 2012 pay, SIGTARP found, these executives continue to lack an appreciation for their extraordinary situations and fail to view themselves through the lenses of companies substantially owned by the U.S. Government. For example, the report noted that General Motors CEO Dan Akerson even asked Treasury Secretary Geithner to relieve the company from OSM's pay restrictions, a request which was denied.

In SIGTARP's view, two lessons can be learned from OSM's 2012 pay-setting process and decisions. First, guidelines aimed at curbing excessive pay are not effective, absent robust policies, procedures, or criteria to ensure that the guidelines are met. Even if the Acting Special Master thinks that OSM has already succeeded in achieving its mission by limiting compensation for these executives from pre-TARP levels or believes that OSM's existing processes are sufficient, SIGTARP questioned whether this is sufficient for taxpayers. In SIGTARP's view, Treasury continues to award excessive pay packages, including large guaranteed cash salaries. Meaningful reform is still possible, however, because General Motors and Ally Financial remain under OSM's jurisdiction. Without meaningful reform, including independent analysis by OSM, Treasury risks that TARP companies could potentially misuse taxpayer dollars for excessive executive compensation.

Second, SIGTARP believes that regulators should have an active role in monitoring and regulating factors that could contribute to another financial crisis, including executive compensation that encourages excessive risk-taking. Accordingly, SIGTARP recommended that each year Treasury should reevaluate compensation for employees in the Top 25 from the prior year; develop policies, procedures, and criteria for approving pay in excess of Treasury guidelines; independently analyze whether good cause exists to award a pay raise or cash salary over $500,000; and return to using long-term restricted stock for employees, particularly for senior employees such as CEOs.

Companies: Ally Financial Inc.; American International Group, Inc.; General Motors Corporation.

LitigationEnforcement: CorporateGovernance

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