Pay Czar Clause

DEFINITION of 'Pay Czar Clause'

A buzz word describing a clause found in financial institutions' employment contracts that would subject compensation terms to the U.S. government's approval. These clauses would allow the financial institution to offer attractive bonus plans to employees, but also provide recourse in the event that the government prevents the payout from happening, either through regulations or direct intervention.

BREAKING DOWN 'Pay Czar Clause'

As a result of the TARP in 2009, some financial institutions were the subject of much public outcry when it was found out that some of the bailed-out banks needed to pay millions in bonus pay as a result of employee contracts made prior to the financial crisis. Adding a "pay czar" clause to an employment contract will effectively leave the fate of executive compensation at bailed-out firms in the hands of the pay czar, the U.S. government's official representative in charge of overseeing executive compensation.