Banks Force Execs to Sign Contracts With Pay Czar Clauses

Large financial institutions are forcing top executives to sign contracts that make their compensation packages contingent on approval by the Treasury Department's "pay czar."

The clauses, first reported by the Reuters news agency, appear to act as a legal backstop for the companies. Kenneth R. Feinberg, the Treasury Department's special master for compensation issues, is currently reviewing compensation plans at seven of the largest firms to received bailout funding.

"If you enter into an agreement and the pay czar comes back and says, 'You can't pay that,' then you would be stuck between a contractual obligation to the individual and a legislative or government mandate," Laura Thatcher, a lawyer with Alston & Bird, told Reuters.

The companies known to be insisting on the new language -- Citigroup Inc., American International Group Inc., and Bank of America Corp. -- are among those subject to Feinberg's immediate oversight.

AIG, whose attempts earlier this year to pay $165 million in bonuses to employees of its financial services division largely prompted the Treasury to create the pay czar position, included a contingency clause in its recently announced contract with Robert H. Benmosche, its chief executive.

That deal was worth $10.5 million, much of it in company stock. It is contingent on Feinberg's "formal review and approval" and other "applicable regulations," Reuters reported after reviewing the contract.