This week, Washington erupted into bipartisan political fury when it became known that AIG had paid $165 million in retention bonuses to employees from divisions that contributed to the company's collapse last fall. The issue has created significant rancor on Capitol Hill and dominated virtually all political and policymaking activity throughout the week. Amid the public outrage voiced by the Obama Administration and Congressional leaders of both parties, both the House of Representatives and Senate have acted quickly to develop legislation addressing the issue.

House Activity

Taxation of Bonus Payments. On Thursday, March 19, the House of Representatives passed H.R 1586 by a vote of 328-92. The legislation, introduced on Wednesday by House Ways and Means Committee Chairman Charles Rangel (D-NY) and 50 Democratic cosponsors, would subject to any bonuses paid to employees of recipients of more than $5 billion from the Troubled Asset Relief Program (TARP), Fannie Mae and Freddie Mac, affiliates of such entities, and partnerships more than 50% owned (by capital or profits) by such entities and affiliates, to a special income tax. The legislation sets the rate of such tax at 90% of the lesser of: (1) the bonus amounts paid; or (2) the amount of such taxpayer's adjusted gross income exceeding $250,000, or $125,000 in the case of a married individual filing a separate return. H.R. 1586 applies to any bonus paid after December 31, 2008 and is in place through the period of time in which the paying institution and/or its affiliates holds TARP funds in excess of $5 billion. If an institution and its affiliates return TARP funds to government that place it below the $5 billion threshold or if bonuses are returned to the institution by employees, the special tax does not apply. The legislation defines "bonus" broadly to include any retention payment and any payment for services that is not a regular hourly, daily, weekly, monthly or other periodic wage payment, a commission, a welfare or fringe benefit or an expense reimbursement. It appears that payments to foreign individuals who are not subject to U.S. income tax would escape the special tax.

Compensation Standards. In addition to action on H.R. 1586, on Thursday the House Judiciary Committee passed H.R. 1575, the End Government Reimbursement of Excessive Executive Disbursements (End GREED) Act. The legislation, expected to be brought to the House floor next week for consideration applies to institutions that have received more than $10 billion in federal financial assistance since September 1, 2008, and has two key components.

First, it creates a federal fraudulent transfer statute that will allow the Attorney General to recover prior excessive payments to employees made by an institution. This allows the government, as a creditor, to show that excessive payments were made bearing no relationship to fair value and to recover those payments.

Second, on a going forward basis, it allows the Attorney General to limit payments to an institution's executives to ten times the average non-management wages, just as would have been the case if the institution had been forced into bankruptcy. In addition, the bill authorizes the Attorney General to issue a subpoena to obtain pertinent information from these institutions about employee bonus and compensation payments.

Companion legislation has yet to be introduced in the Senate.

Complementing these efforts, on Friday, March 20, House Financial Services Committee Chairman Barney Frank (D-MA) released draft legislation amending the Emergency Economic Stabilization Act (EESA) to prohibit institutions receiving any TARP support, the GSEs, and Federal Home Loan Banks to pay "unreasonable or excessive" compensation generally, and specifically any non-performance based bonuses, during the term of the government's investment in the institution. The bill further authorizes the Secretary of the Treasury to develop standards for prospective performance-based compensation and to determine if compensation falls under the broad umbrella of the "unreasonable or excessive" within 30 days of its enactment. This authority extends to pre-existing employment contracts as well as to any future ones. In establishing these standards, the Secretary must take into consideration the stability of the institution, the performance of the executive or employee, the adherence to appropriate risk management requirements by the executive or employee, and accountability to taxpayers.

This legislation is set to be considered by the Financial Services Committee as soon as Tuesday, and may be considered on the House Floor during the week of March 30.

As with the Judiciary bill, companion legislation has not been introduced in the Senate.

Senate Activity

Taxation of Bonus Payments. On March 19, Senate Finance Committee Chairman Max Baucus (D-MT), Committee Ranking Member Charles Grassley (R-IA), Sen. Ron Wyden (D-OR), and Sen. Olympia Snow (R-ME) introduced S. 651, the Compensation Fairness Act of 2009. Unlike the House legislation, the Senate bill applies to most companies receiving more than $100 million in assistance under either TARP or the emergency provisions of the Federal Reserve Act, Fannie Mae and Freddie Mac, and affiliates of such entities and to bonus payments by those entities in excess of $50,000 to any individual. The Senate bill imposes a 35% excise tax payable by the payer and an additional 35% excise tax payable by the recipient on the amount of any retention bonus plus the amount by which any other bonus payment exceeds $50,000. If an excise tax cannot be collected from the payee, the payer's excise tax rate is increased to 70%, effectively assuring that payments to foreign and domestic taxpayers are taxed at the same rate. The Senate bill applies to any bonus paid after December 31, 2008 and is in place through the period of time in which the paying institution and/or its affiliates holds federal government assistance in excess of $100 million. If an institution and its affiliates return funds to the government that place it below the $100 million threshold or if bonuses are returned to the institution by employees, the excise tax does not apply. The legislation defines "bonus" in the same manner as H.R. 1586, with additional exceptions for qualified retirement plan contributions, overtime pay, fair market value stock options and stock appreciation rights granted after December 31, 2008 that do not vest for at least three years from grant, and restricted stock grants that do not exceed one-third of total compensation in value and do not vest while federal government assistance is outstanding. The Senate bill also requires withholding of the excise tax from bonus payments and information reporting with respect to bonus payments and taxes withheld.

Deferred Compensation. The Senate bill also imposes a $1 million annual limit on compensation that may be deferred after the date of enactment. Annual earnings on deferred compensation are counted toward the $1 million limit to the extent they exceed a market rate of return. The limit applies to any recipient of federal government assistance that is covered by the excise tax provisions, effectively preventing the use of deferred compensation arrangements to avoid the excise tax regime for large payments but apparently permitting this strategy for smaller payments that are deferred until federal financial assistance has been repaid or reduced to below $100 million.

The Senate has not yet set a timeline for debate on S. 651. Majority Leader Harry Reid (D-NV) has indicated the Chamber will likely take up national service legislation on the Senate Floor to begin the week, but has made no statement about when he might bring an AIG-related bill to the Floor.