By DEBORAH SOLOMON in Washington and SARA SCHAEFER MUñOZ and ALISTAIR MACDONALD in London
Authorities on both sides of the Atlantic are moving to enact tough curbs on pay, in an indication that governments are taking increasingly aggressive steps to rein in compensation after the financial crisis.
In the U.S., the Treasury Department's pay czar, Kenneth Feinberg, is poised to enact tougher-than-expected rules for employees at companies that received large amounts of government assistance. The U.K. on Wednesday slapped banks with a 50% tax on portions of bonuses they pay to individuals, in perhaps the most aggressive move yet by a government.
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Reuters Britain's Chancellor of the Exchequer Alistair Darling after giving his pre-budget report to Parliament Wednesday.
Mr. Feinberg has already capped salaries of top employees under his review. Now, according to government and company officials, he's going after the next tier and is expected to impose $500,000 salary caps on hundreds of employees at the companies.
Mr. Feinberg is expected to allow firms to pay more if they can show "good cause." But the move, which could be announced Friday, goes beyond what some had been expecting.
Mr. Feinberg's move is already spurring a reaction, with Citigroup
Inc. pushing to quickly repay the U.S. government's investment in the New York company. The firm hopes to sell $10 billion to $15 billion of stock in coming days to raise funds to repay at least some of the investment, according to people familiar with the matter.
The U.K. tax, unveiled as part of the government's tax-and-spending, or pre-budget, report, is an effort by the ruling Labour Party to address public anger over bonuses before next year's general election. It will also apply to the thousands of Americans employed by major U.S. banks that operate in London, such as Citigroup Inc., J.P. Morgan Chase
& Co., Bank of America
Corp., Morgan Stanley
and Goldman Sachs Group
The U.K.'s announcement has already spurred employees of some U.K. banks to inquire about a temporary transfer to other offices through April, to avoid the tax, says one person close to the matter. When the news hit Wednesday, flurries of emails from colleagues in New York and elsewhere landed in the inboxes of bankers in London, expressing disbelief or offering sympathy over news of the bonus crackdown.
At the Future of Finance Initiative in England, Chancellor of the Exchequer Alistair Darling speaks on why London is a key financial center, how outside competition would help the economy, and why economics should always come before politics.
News Hub: Bankers Uneasy Over Pay Taxes
3:22 The News Hub panel discusses how the UK and France's taxes on executive pay is causing concerns for bankers everywhere.
The tax, which would remain in effect until April 5, 2010, also reignited sharp debate over London's future as a financial center and heightened tension between the government and members of the banking community here, who said the move would put them at a competitive disadvantage.
The U.K. bonus tax will be paid by banks on discretionary individual bonuses that exceed £25,000 ($41,000). For instance, if a bank pays an individual a bonus of £30,000, it would pay a 50% tax on the £5,000 portion over the threshold. The individual's income tax wouldn't be affected. The new tax applies only to discretionary bonuses. Banks will avoid the charge for payments to any banker whose bonus is guaranteed by contract.
Law firm Thomas Eggar LLP estimates that banks operating in the U.K. plan to pay about £6 billion in bonuses this year.
The government says the tax will raise about £500 million for the deficit-laden U.K. budget. But a U.K. Treasury spokeswoman said the driving idea behind the tax is to end the banking industry's culture of compensating risk-takers and to push down bonuses so that banks retain more capital and step up lending.
The U.K. tax goes much further than measures in the U.S., where officials have moved to limit bonuses at companies receiving the most substantial government assistance. But efforts to impose a flat tax on bonuses received by certain executives at American International Group Inc. have failed, and Congress and the Obama administration haven't broadly considered such measures.
Citigroup, Credit Suisse Group, Goldman Sachs Group, Morgan Stanley and J.P. Morgan declined to comment. But one firm said shortly after Thursday's announcement that it was getting phone calls with questions about the bonus tax.
The U.K.'s move takes it far beyond anything done elsewhere in Europe. In France, the administration of President Nicolas Sarkozy has introduced a code of conduct to police banker remuneration but stopped short of imposing taxes or caps on bonuses.
A joint editorial by Mr. Sarkozy and U.K. Prime Minister Gordon Brown in Thursday's Wall Street Journal endorses the idea of a one-time bonus tax, though the French leader wants to see it implemented globally first.
Treasury chief Alistair Darling announced the tax to the House of Commons, saying that banks' priority "should be to rebuild their financial strength and increase their lending. If they insist on paying substantial rewards, I am determined to claw money back for the taxpayer," he said.
Still, the government knows it is treading a fine line between sating public anger and wounding an industry that, at its height, contributed over 25% of its corporate tax take. On Monday, Mr. Darling assured a room full of bankers that finance "is a big industry for us and I am determined that we do not do anything that undermines that position."
Tax lawyers say a big concern across the financial services industry is the potentially broad scope of the Treasury's definition of a bank. The Treasury's draft legislation says the bonus tax would apply to an "investment company or financial trading company" within a banking group or building society -- which for large financial-services firms such as Barclays or Bank of America could include everything from their commodities-trading desks to an internal hedge fund or mutual fund.
Treasury officials Wednesday made clear they would try to block any loopholes that banks seek to skirt the tax. It is part of a budget that is expected to be passed early next year, but would apply retroactively starting Wednesday.
In the U.S., six firms still subject to Mr. Feinberg's pay curbs have asked to exempt about 12 of 450 employees from the salary caps, with one request to go above $1 million, government and company officials said.
“Europe led the way last year in facing down the global financial crisis… Now we need to once again lead the way in forging a new global consensus.” Gordon Brown and Nicolas Sarkozy in The Wall Street Journal
Mr. Feinberg was charged with overseeing pay "structures" for the 26 to 100 most highly compensated employees at firms that have received the most federal assistance -- but he wasn't expected to set salary levels for that group.
Bank of America on Wednesday repaid its $45 billion government investment, freeing it from further pay curbs. Bank of America has agreed to honor Mr. Feinberg's 2009 pay determinations for the top 25 employees but will not be subject to further review.
Citigroup has asked for similar treatment, government officials said. Citigroup executives and federal officials continue to negotiate the terms of any repayment, these people said. A Citigroup spokesman declined to comment.
A key issue is the status of the U.S. government's agreement last fall to protect Citigroup against most losses on $301 billion of assets. The Treasury told Citigroup executives this week the company wouldn't officially be out from under TARP if taxpayers remained on the hook for potential losses on those assets. As a result, Citigroup executives are pushing to dissolve that agreement, according to people familiar with the matter.
The negotiations between Citigroup and federal officials have exposed rifts between different arms of the U.S. government. The Treasury is eager for big banks to repay TARP funds as soon as they are able, but has differed with other federal regulators over the proper capital structure for banks that want to repay.
—David Gauthier-Villars, Dana Cimilluca, Damian Paletta, David Enrich and Susanne Craig contributed to this article.
Deborah Solomon at firstname.lastname@example.org
, Sara Schaefer Muñoz at email@example.com
and Alistair MacDonald at firstname.lastname@example.org