Pay Czar Clause
Pay Czar Clause: An Overview
A pay czar clause is a section of boilerplate language added to a financial institution's executive employment contracts that makes the compensation terms subject to endorsement by the U.S. government.
The pay czar clause became common after the 2008-2009 bailout of financial institutions by the U.S. government.
These clauses permit the financial institution to keep on offering alluring bonus plans to their top employees, yet in addition give the employer cover if the government blocks the payout, either through regulations or direct intervention.
The Pay Czar Clause In Depth
In the midst of the financial crisis, the Troubled Asset Relief Program (TARP) in 2009 poured some $426 billion in taxpayer money in direct loans into the country's biggest financial institutions for them to use to cover a short-term cash-stream problem that had arrived at stunning magnitude. These were the banks that were considered "too big to even think about failing."
The loans were eventually paid back with interest. Be that as it may, in the interim, the banks confronted serious examination from taxpayers. Wall Street financial firms supposedly paid out a total of $20 billion in bonuses alone in 2009, the year after the bailout. This included about $1.6 billion paid out to employees of 17 banks rescued by the government, including Citigroup, Bank of America, and Goldman Sachs.
The organizations called attention to that the payments were contractual commitments, and had been in place since before the crisis. Taxpayers, large numbers of whom were enduring the financial anxieties brought about by the Great Recession, were disinterested.
The excitement prompted the Obama Administration to name the first, thus far the main, pay czar to supervise the banks' utilization of taxpayer funds.
Enter the Pay Czar
Kenneth Feinberg, an attorney specializing in intercession and alternative dispute resolution, was named Special Master for TARP Executive Compensation.
Feinberg called the bonus payments "silly" however didn't demand that they be revoked. In a meeting, he told NPR that Congress didn't give him any enforcement authority regarding this situation and, anyway, the payments were not technically unlawful. At that point, 11 of the 17 companies had as of now repaid their government loans in full.
Feinberg figured out how to push through reductions by an average of 90% in the cash compensation paid to 25 top executives of seven companies that received the greatest levels of TARP assistance, as per news reports at that point.
Eventual outcomes of the Crisis
In any case, Feinberg never tried to refute the payment contracts of Wall Street executives, whether he agreed with the terms. In a meeting for the magazine distributed by the Wharton School at the University of Pennsylvania, he said: "I won't do that. Individuals said, 'That is socialism, that is erratic, that is impulsive, that is off-base. [Under] the rule of law, those contracts are hallowed'."
Anyway, the pay czar clause might wait in some Wall Street employment contracts right up 'til now, just in case it's always required.
Features
- For a short time frame, the U.S. government had a critical ownership share of the country's biggest financial institutions.
- It has been vital just once when the U.S. government demanded oversight of executive compensation at banks rescued during the 2008-2009 financial crisis.
- A pay czar clause makes an employment agreement's terms subject to U.S. government endorsement.
