I’m very happy to see that my former boss, Senator Chris Dodd, has gone out and done the right thing over administration objections. The New York Times reports:

A provision buried deep inside the $787 billion economic stimulus bill would impose restrictions on executive bonuses at financial institutions that are much tougher than those proposed 10 days ago by the Treasury Department.

The provision, inserted by Senate Democrats over the objections of the Obama administration, is aimed at companies that have received financial bailout funds. It would prohibit cash bonuses and almost all other incentive compensation for the five most senior officers and the 20 highest-paid executives at large companies that receive money under the Treasury’s Troubled Asset Relief Program, or TARP.

The stimulus package was approved by the House on Friday, then by the Senate in the late evening.

The pay restrictions resemble those that the Treasury Department announced this month, but are likely to ensnare more executives at many more companies and also to cut more deeply into the bonuses that often account for the bulk of annual pay.

The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.

The provision, written by Senator Christopher J. Dodd, Democrat of Connecticut, highlighted the growing wrath among lawmakers and voters over the lavish compensation that top Wall Street firms and big banks awarded to senior executives at the same time that many of the companies, teetering on the brink of insolvency, received taxpayer-paid bailouts.

“The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence,” Mr. Dodd said Friday. “These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.”

Top economic advisers to President Obama adamantly opposed the pay restrictions, according to Congressional officials, warning lawmakers behind closed doors that they went too far and would cause a brain drain in the financial industry during an acute crisis. Another worry is the tougher restrictions may encourage executives to more quickly pay back the government’s investments since, in a compromise with the financial industry, banks no longer have to replace federal funds with private capital. That could remove an extra capital cushion, further reducing lending.

The key with Dodd’s provision is that it sets the caps retroactively and not just moving forward. A lot of corporations who took billions from the taxpayer coffers and spent substantially on their executives, and not on getting the economy moving forward, are going to have to give the money back. This is meaningful accountability and it shows that the US government will not tolerate rewarding people who ran their companies into the ground and then came begging for cash from Uncle Sam.

This is an important part of the stimulus legislation. It would be deeply disappointing if the administration tried to cut it out or nullify it in any way.