ILRHR4631 Week 5 Lecture Feb 16 2009

ILRHR4631 Week 5 Lecture Feb 16 2009 - Managing...

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Managing Compensation Spring 2009 ILRHR 4631 Week 5 Lecture Charles G. Tharp
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Financial Sector Bailout As the housing market bubble burst and people started to default of their mortgages, banks were not able to make new loans. Subprime mortgages were very risky Mortgage-backed securities were highly leveraged investments The defaults caused a liquidity crisis among major banks and financial institutions
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Financial Sector Bailout To help bring liquidity back into the financial markets the federal government: Forced/facilitated some mergers of financial institutions But allowed Lehman Brothers to go bankrupt Gave billions of dollars to help provide liquidity so banks could start making loans again Approve a new Stimulus Bill to jump-start the sectors beyond the financial sector
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Financial Sector Bailout As part of all of the bailout stimulus the government placed restrictions on executive pay Limited deductibility Increased the tax on severance (“golden parachutes”) Prohibited golden parachutes in new contracts Required that incentives not promote “excessive risk” taking
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American Recovery and Reinvestment Act of 2009 Last week the House and Senate passed a Stimulus Bill to provide additional funds for the economic recovery The Bill also contained further restrictions on executive pay for banks receiving government funds Example of the “golden rule” He who has the gold makes the rules If the banks don’t like the rules they can pay back the bailout money and do what they please regarding pay
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Reinvestment Act of 2009 Limits on compensation that excludes incentives for senior executive officers to take unnecessary and excessive risks that threaten the value while they receive government bailout funds Clawback provision for the recovery of any bonus, retention award, or incentive compensation paid to a senior executive officer and any of its next 20 most highly- compensated employees if the payout is found to have been based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate; Prohibition on any golden parachute payment to a senior executive officer or any of the next five most highly-compensated employees during the period in which any obligation arising from financial assistance provided remains outstanding for these purposes, a "golden parachute payment" is defined to mean "any payment to a senior executive officer for departure from a company for any reason" except for payments for services performed or benefits accrued A prohibition on any compensation plan that would encourage manipulation of the reported earnings to enhance the compensation of any of its employees. A limit on deductibility of compensation to $500,000 [IRC Section 162(m)(5)]
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This note was uploaded on 03/18/2009 for the course ILRHR 4631 taught by Professor Tharp during the Spring '09 term at Cornell University (Engineering School).

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ILRHR4631 Week 5 Lecture Feb 16 2009 - Managing...

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