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 approval 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 allow the financial institution to continue to offer attractive bonus plans to their top employees, but also provide the employer with cover in the event that the government blocks the payout, either through regulations or direct intervention.
- A pay czar clause makes an employment contract's terms subject to U.S. government approval.
- It has been necessary only once when the U.S. government demanded oversight of executive compensation at banks bailed out during the 2008-2009 financial crisis.
- For a brief time, the U.S. government had a significant ownership share of the nation's biggest financial institutions.
The Pay Czar Clause In Depth
Amid the financial crisis, the Troubled Asset Relief Program (TARP) in 2009 poured some $426 billion in taxpayer money in direct loans into the nation's biggest financial institutions for them to use to cover a short-term cash-flow problem that had reached epic proportions. These were the banks that were deemed "too big to fail."
The loans were eventually paid back with interest. But in the interim, the banks faced severe scrutiny from taxpayers. Wall Street financial firms reportedly 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 bailed out by the government, including Citigroup, Bank of America, and Goldman Sachs.
The firms pointed out that the payments were contractual commitments, and had been in place since before the crisis. Taxpayers, many of whom were suffering through the financial stresses caused by the Great Recession, were unimpressed.
The furor led to the Obama Administration to name the first, and so far the only, pay czar to oversee the banks' use of taxpayer funds.
Enter the Pay Czar
Kenneth Feinberg, an attorney specializing in mediation and alternative dispute resolution, was appointed Special Master for TARP Executive Compensation.
Feinberg called the bonus payments "ill-advised" but did not demand that they be rescinded. In an interview, he told NPR that Congress did not give him any enforcement authority in the matter and, in any case, the payments were not technically illegal. At the time, 11 of the 17 companies had already repaid their government loans in full.
Feinberg did manage 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, according to news reports at the time.
Aftereffects of the Crisis
Still, Feinberg never sought to invalidate the payment contracts of Wall Street executives, whether or not he agreed with the terms. In an interview for the magazine published by the Wharton School at the University of Pennsylvania, he said: "I'm not going to do that. People said, 'That's socialism, that's arbitrary, that's capricious, that's wrong. [Under] the rule of law, those contracts are sacrosanct'."
In any case, the pay czar clause may linger in some Wall Street employment contracts to this day, just in case it's ever needed.