Secretary Paulson talked tough about holding executory pay in check under Treasury’s rescue plan. But don’t expect execs to give up much

By Theo Francis

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JPMorgan Chase CEO Jamie Dimon foliage a congregation at the Treasury Dept., Oct. 13 in Washington. Mark Wilson/Getty Images

It was clear early on, as Congress debated legislation to rescue the U.S. financial system, that public anger over the excesses of the financial-services industry would lead lawmakers to palm limits on executory compensation for companies seeking direction help. Now, with the Treasury Dept. laying out its new plan (BusinessWeek.com, 10/13/08) to array as much as $250 billion in U.S. banks and thrifts, the first glimpse of those pay restrictions are becoming clear. They are somewhat tougher than Congress required, but don’t expect them to make much immediate difference—and in the end, it probably won’t cost most numerous executives a cent.

So well-nigh, Treasury has solitary issued a broad account of the rules it will impose on companies in which it invests. Detailed regulations are silent to come. But Treasury generally hewed closely to the bill Congress passed, providing little additional detail. As long as Treasury holds preferred shares and warrants issued in subordination to the reinvigorated program, companies must:

• Make sure incentive pay for top executives "does not animate unnecessary and immoderate risks that portend the value of the financial institution."

• Establish "clawback" provisions requiring top executives to repay bonuses and other incentive pay that were "based upon the body statements of earnings, gains, or other criteria that are later proven to be materially inaccurate."

• Ban certain "golden parachute" packages for departing executives.

• Limit tax deductions adhering top executives’ pay to that which doesn’confidentially exceed $500,000.

Strictly discourse, that last item wasn’t requirement—Congress included a similar measure under a different provision of the bill, but Treasury officials declared they chose to apply it under the capital-purchase program. Compensation attorneys say it remains unclear whether Treasury is simply extending an existing march forward tax breaks for executive make payment to, which normally limits non-incentive reparation to $1 million a year for top executives, or limiting a much broader range of pay that includes bonuses and some stock.

Either way, the rules aren’t credible to affect pay for most executives. Consultants and attorneys say the specific restrictions for the most part apply to unusual circumstances, parallel mergers or pecuniary deceit. Even the tax-deduction provision, which could cost companies millions of dollars, probably won’face to face change primary punish practices.

To be an intelligent being why, consider JPMorgan Chase (JPM), that is expected to believe a $25 billion investment from the Treasury. For 2007, the bank said it paid disclosed some $88.63 million in reward for James Dimon, chairman and CEO, and four other top executives. That counts salary, bonus, stock awards, and perks likely covered under the tax-deduction provision. Using the company’session operative tax rate of about 33%, it comes out to perhaps $29 the public in deductions for their pay.

If Treasury is just lowering the existing $1 million pay limit to $500,000, then JPMorgan would have obdurate $500,000 in burden deductions in 2007—about $165,000 in tax benefit at its 33% powerful tax rate. That’s because only one executive, Dimon, earned other than $500,000 in non-incentive pay: His salary was $1 million.

By contrast, if Treasury is taking a much broader interpretation of pay, JPMorgan would suffer by comparison $28.4 million of deductions, leaving it good $825,000 in deductions. Even that $28.4 million, though, isn’t very impressive. Those lost tax breaks would amount to perhaps a fifth of 1% of the $15.4 billion in net income that JPMorgan reported earning afterwards taxes last year.

A JPMorgan Chase spokeswoman had no comment tardily Tuesday, Oct. 14. "It’s not meaningful," says Pearl Meyer, senior intriguing director of executive-compensation consultant Steven Hall & Partners, speaking generally. Companies "are going to pay people what they need to."