Bonus Limits Not As Bad As They Look


An earlier draft of The Stimulus would have given the government the right to claw back any 2008 TARP-firm bonus larger than $100,000 and limit all future bonuses to $400,000.  This would have been quite a jolt.

The new version of The Stimulus, which is now law, is not as punitive. It also offers an easy workaround.

The law now limits bonuses of TOP execs (25 at most, not ALL) to 1/3rd of their total annual compensation.  In other words, if you make a $1 million salary, you can get a bonus of $500,000.

This will obviously eliminate the $25 million paydays that have become the norm in recent years (including last year at Merrill Lynch). By focusing on “bonuses” instead of total compensation, however, the government has of course opened a loophole wide enough to fly a 747 through.

What will happen to 2009 compensation at TARP banks?  Salaries will rise and bonuses will shrink as a percentage of total compensation.

Some movement in this direction might actually be healthy.  Shifting total comp away from bonuses toward salaris will encourage less risk-taking. It will also probably make the firm’s less profitable in fat years than the would otherwise be. But if this means the firms will also survive the next financial cataclysm, it’s probably not a bad thing.

And, of course, if/when TARP banks do manage to pay off government aid, bonuses can go through the roof again.

More detail on the bonus limits here >