Compensation rules for financial companies might establish a trend.

• Author: Ralston, Hank
• Position: LAW JOURNAL 2009 - Law overview

Legislation enacted in response to the financial crisis contains important restrictions on firms that participate in government programs, particularly involving executive compensation. Media attention and public outcry over executive compensation in the industry have led to more proposals on this topic. While the current wave of rules and restrictions has financial institutions scrambling to keep up and comply, the increased focus on executive compensation could have important implications that go well beyond the financial-services industry. Businesses of all types and sizes are following the new rules with interest, as they may set the tone for more broad-based compensation rules or "best practices" in a wide range of settings.

The first major piece of legislation enacted in response to the financial crisis was the Emergency Economic Stabilization Act of 2008--popularly called the "bailout bill" when it was adopted in October 2008. This is the legislation that gave rise to the Troubled Asset Relief Program and related programs under which the federal government makes investments in financial institutions and other companies. In February, Congress passed the American Recovery and Reinvestment Act of 2009, commonly referred to as the "stimulus bill." Both bills contain a number of restrictions on executive compensation at companies that accept TARP funds from the government, some that supplemented existing rules. In addition, ongoing publicity about compensation in the financial-services industry has led to increased pressureto further restrict executive compensation and has encouraged lawmakers to propose more regulations.

The Enron/Worldcom scandals earlier this decade and the related economic downturn spawned the Sarbanes-Oxley Act of 2002, which led to an array of rules and standards for corporate governance and financial reporting. Many were technically applicable only to public companies, but they have established standards that are now widely viewed as best practices for a larger variety of entities, including nonprofits. Just as the Sarbanes-Oxley standards introduced ideas that became the foundation for rules applicable to many entities, some have speculated that the concepts underlying the executive-compensation limitations contained in recent bailout and stimulus legislation will affect debate and rulemaking that will ultimately govern business entities well beyond the financial sector.

One of the most fundamental compensation...