Pay Czar Clause

A pay czar clause is a buzzword 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.

As a result of the Troubled Asset Relief Program (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.

Pay czar was a nickname given to Kenneth Feinberg, the person appointed by the U.S. Treasury Department under the Obama Administration to monitor executive bonuses provided by financial firms that accepted bail-out money during the 2008-2009 crisis.

While many Main Street investors lost money on stocks and real estate, Congress voted to help struggling banks, brokers and insurers to the tune of $700 billion of taxpayer money. While these financially infused firms were part of the TARP, they continued to pay executives big bonuses.

That didn’t bode well with the general public; thus, the appointment of Feinberg and the reviewing of compensation plans. He had the power to approve or disapprove any bonus he thought was out of line or unnecessary.

Some of the beneficiaries of TARP included, Citi, Bank of America, AIG, Chrysler Financial, Chrysler Group LLC, General Motors Co. and GMAC Inc. Insurance provider AIG, for example, paid $165 million in bonuses to employees responsible for much of the credit derivative losses. Many of these companies insisted that they would lose key employees if contracts included bonuses but then were not allowed due to new governmental regulations and policies.