Executive Pay Caps Will Mean More Stock Options For Execs

Of course the limits on executive pay won’t work.Wall Street is always going to find ways to pay for its top talent. If it can’t, the talent will just move to privately held companies.

But if the new rule do better align management interest with the long term health of a firm, by moving more comp into options, that will be some progress.

The Deal’s Ron Orol says that’s exactly what could happen:

Columbia University Law School professor John Coffee says he believes this limitation could end up pushing more board compensation committees to allocating stock options as a way of offsetting reductions in salary stemming from the prohibition. The pay-package transfer could follow a similar shift toward stock options that took place after companies across the board were prohibited by a 1993 regulation from deducting, for the most part, more than $1 million in CEO pay. “By limiting tax deductibility for salaries and bonuses, you encourage firms to move out of salaries and bonuses for compensation packages,” Coffee says.

Such a shift to stock option payments may be limited by recent regulatory prohibitions on stock option expensing. Some academics and other observers are raising questions about whether a vague provision in the Treasury rules barring pay packages that encourage “unnecessary and excessive risks that threaten the [firm’s] value” could discourage stock option grants. The provision, which Treasury has no plans to clarify, requires bank board pay package committees to interpret this small but important section. Without further guidance, expect many compensation committees to take a hard look at stock option risks when drafting internal bylaws based on the rule. “Treasury doesn’t want executive compensation packages to encourage excessive risk taking, and stock options are the part of the compensation package that is most likely to provide the executive with the incentive to take risks,” says Temple University Business School professor Steven Balsam.

All this could lead to more restricted stock grants, where a CEO is provided stock that can’t be sold for a certain period of time, say, four years. Balsam says restricted stock programs may gain acceptance by participating banks because they don’t rely on performance and are presumably less risky.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.

Tagged In