By EDMUND L. ANDREWS and VIKAS BAJAJ, New York Times
WASHINGTON — President Obama announced on Wednesday a salary cap of $500,000 for top executives at companies that receive the largest amounts of money under the $700 billion federal bailout, calling the step an expression not only of fairness but of “basic common sense.”
“We all need to take responsibility,” the president said, in discussing the compensation restrictions, which include an exception for restricted stock. He also used the occasion to prompt Congress once again to act on his separate economic stimulus program, whose cost could approach $1 trillion.
Mr. Obama repeated his comments that some Wall Street executives had shown “the height of irresponsibility” when millions of nonwealthy Americans were bearing the burden of Wall Street’s failures.
The people are sick and tired, Mr. Obama said, of seeing Wall Street executives come to the government “hat in hand when they were in trouble, even as they paid themselves customary lavish bonuses.”
“This is America, we don’t disparage wealth,” the president said. “We don’t begrudge anybody for achieving success. And we certainly believe that success should be rewarded.”
But Americans definitely begrudge “executives being rewarded for failure,” especially if their earning are subsidized by taxpayers, “many of whom are having a tough time themselves,” he said.
Treasury Secretary Timothy F. Geithner, appeared with the president to announce the restrictions, which do not require Congressional approval. “The economic crisis was caused in part by a loss of confidence in our financial institutions, and it was made worse by a loss of faith in the quality of judgments made by some executives and some boards of directors,” Mr. Geithner said.
There is a general feeling among not-so-rich Americans, he said, that they are bearing a greater burden because of the financial crisis than those who helped to create it. Mr. Geithner said he would devote “every ounce of energy” to restore public trust in financial institutions — the bedrock of the country’s credit system.
The $500,000 salary cap will be stricter for those companies getting “exceptional assistance” from the Treasury Department. “Exceptional assistance” companies wanting to pay executives more than $500,000 will have to do so by using stock that cannot be sold or liquidated until the government money is paid back.
More healthy companies that get government help will also be under the $500,000 cap, but can waive it more easily providing that they do so with full public disclosure.
The president used the White House announcement to call for quick action on his stimulus plan, the cost of which could approach $1 trillion, depending on the final version that emerges after Senate and House conclude their negotiations. (The president has said the final package should not exceed $900 billion.)
“The economic crisis we face is unlike any we’ve seen in our lifetime,” the president said. “It’s a crisis of falling confidence and rising debt, of widely distributed risk and narrowly concentrated reward.”
“A failure to act, and act now, will turn crisis into catastrophe and guarantee a longer recession, a less robust recovery and a more uncertain future,” the president said.
“No plan is perfect, and we should work to make it stronger,” the president said. “But let’s not make the perfect the enemy of the essential.”
While indicating, again, that he is willing to be flexible, Mr. Obama dismissed some Republican criticisms of his program, saying that they “echo the very same failed economic theories that lead us into this crisis in the first place,” among them a “notion that tax cuts alone will solve all our problems.”
Under the new Treasury Department restrictions, executives of companies getting bailout money will also be prohibited from receiving any bonuses above their base pay, yet they could receive additional compensation through restricted stock, which would not vest until taxpayers have been repaid.
The new rules will be far tougher than any imposed during the Bush administration, and they could force executives to accept deep reductions in pay. They come amid rising public fury about huge pay packages for executives at financial companies being propped up by federal tax dollars.
Under the regulations announced today, executives at companies that have already received money from the Treasury Department will not have to make any changes. But analysts and administration officials are bracing for a huge wave of new losses, largely because of the deepening recession. Many companies that have already received federal money may well be coming back and will then face the restrictions.
Moreover, several senators quickly announced proposals to enact salary limits into law for those companies getting federal money; to recover whatever taxpayer money might have been used to pay bonuses, and to disclose all bonuses paid in 2008 and future bonuses for as long as companies are getting federal help.
Under the Treasury’s $700 billion rescue program, most companies that have received money so far have been considered “healthy” rather than on the brink of collapse.
But Citigroup, Bank of America and the American International Group, General Motors and Chrysler were all facing acute problems. And top executives at those companies made far more than $500,000 in recent years.
Kenneth D. Lewis, the chief executive of Bank of America, took home more than $20 million in 2007. Of that, $5.75 million was in salary and bonuses.
Vikram S. Pandit, who became chief executive of Citigroup in December of 2007 and previously held other senior positions at the bank, made $3.1 million.
Rick Wagoner, the chief executive of General Motors, made $14.4 million, much of it in stock, options and other noncash benefits. He earned a $1.6 million salary.
“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”
Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits would make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms.
“It would be really tough to get people to staff” companies that are forced to impose these limits, he said. “I don’t think this will work.”
President Obama last week branded Wall Street bankers “shameful” for giving themselves nearly $20 billion in bonuses as the economy was deteriorating and the government was spending billions to bail out some of the nation’s most prominent financial institutions.
“If the taxpayers are helping you, then you have certain responsibilities to not be living high on the hog,” Mr. Obama said Tuesday, in an interview with “NBC Nightly News.”
Mr. Obama’s rules are coming just as he is expected to ask for additional sums of money, beyond the $700 billion already authorized, to prop up the financial system, even as he pushes Congress to move quickly on a separate economic stimulus package that could cost taxpayers as much as $900 billion.
Last week, Senator Claire McCaskill, Democrat of Missouri, proposed a $400,000 salary limit.
Senator McCaskill, reacting to reports of extravagant perks and bonuses at companies like Merrill Lynch and Citigroup, had blasted Wall Street executives as “a bunch of idiots” who were “kicking sand in the face of the American taxpayer.”
The banks that have received bailout funds already are subject to limits on compensation, but the Bush administration intentionally left them lax. The top five executives at banks that get an equity infusion from the government are restricted from offering golden parachutes, as rich severance packages are called, and any compensation above $500,000 is not tax-deductible to the company.
Companies that received emergency money, like Citigroup, faced somewhat tougher restrictions, including a requirement to reduce the bonus pool for the top 50 executives by 40 percent. But even those restrictions come nowhere near the $500,000 cap.
In a letter to Congress last month, Lawrence H. Summers, director of Mr. Obama’s National Economic Council, suggested that the new pay restrictions would apply to all companies that get federal help.
Without mentioning a particular dollar limit, Mr. Summers wrote that “executive compensation above a specified threshold amount be paid in restricted stock or similar form that cannot be liquidated or sold until the government has been repaid.”