June 11, 2009 - U.S. Targets Excessive Pay for Top Executives Compensation Czar To Oversee Firms At Heart of Crisis By David Cho, Zachary A. Goldfarb and Tomoeh Murakami Tse
The Obama administration named a "compensation czar" yesterday to set salaries and bonuses at some of the biggest firms at the heart of the economic crisis, as part of a broader government campaign to reshape pay practices across corporate America.
Senior officials said they will install Washington attorney Kenneth R. Feinberg with the power to determine compensation, including retirement packages, of senior executives at seven firms that have received massive federal bailouts, such as Citigroup chief executive Vikram S. Pandit, Bank of America's Kenneth D. Lewis and Fritz Henderson of General Motors.
The initiative reflects public uproar over executive compensation, which has been stoked by the financial crisis. Lawmakers who approved the government's $700 billion bailout for the financial system last fall worried that taxpayers would end up financing the lavish lifestyles of top Wall Street executives. Then, controversy erupted in March when the Obama administration revealed that insurance giant American International Group, a recipient of a $180 billion rescue package, had decided to pay $165 million in bonuses to its most troubled financial unit.
Treasury Secretary Timothy F. Geithner said yesterday that the administration is not interested in "capping pay" or "setting forth precise prescriptions for how companies should set compensation." Instead, he said, the government wants to rein in pay practices that motivated executives to take excessive risks in pursuit of profit.
But with the spotlight now on executive pay practices, senior administration officials are moving to address concerns at firms well beyond those implicated in the crisis. Yesterday, officials proposed two pieces of legislation that separately empower shareholders and the Securities and Exchange Commission to exercise more oversight over executive compensation at all publicly traded firms.
The first measure would give shareholders more say on what companies pay executives. Traditionally, stockholders have had limited influence and the authority only to elect a small number of members who sit on a company's board of directors.
The second measure would expand the SEC's power to ensure that the corporate committees responsible for deciding compensation act independently of the top executives whose pay they set. Most large corporations have such committees, and their record in rewarding risky management has at times been troubling. Conflicts of interest between committee members and executives are common.
These efforts reflect the administration's conclusion that companies cannot police themselves on matters of pay.
"This financial crisis had many significant causes, but executive compensation practices were a contributing factor," Geithner said yesterday.
And more initiatives to address these practices are coming. The Federal Reserve is examining how regulators can oversee pay at all banks. Geithner and senior White House officials, meanwhile, plan to make executive pay a focus of their efforts to overhaul financial regulation, which officials say will be detailed next week.
The administration is giving Feinberg authority to influence pay at scores of companies. Feinberg, who previously managed the government's efforts to compensate the families of those killed in the Sept. 11 attacks, will control compensation at seven firms that have received large federal bailouts, including Citigroup, Bank of America, American International Group, General Motors, Chrysler as well as Chrysler Financial and GMAC, which provide loans to auto customers. He will be able to determine salaries, bonuses and retirement packages for all executive officers and the 100 most highly paid employees at each company.
He will also have the authority to set overall compensation, but not precise salary levels, for firms that have received smaller bailouts. The goal, officials said, is to curb the practice of tying pay to performance in a way that induces traders and executives to take big risks. Feinberg can also decide whether executives who have received what he considers excessive compensation should return some of that money.
For months companies have awaited clarification of the compensation restrictions imposed on recipients of bailout money. In February, the administration said it planned to limit salaries to $500,000 at banks that have taken "exceptional assistance." In addition, any bonuses would have to be paid in stock and could not be cashed in until after the government was repaid.
Later that month, Sen. Christopher J. Dodd (D-Conn.) wrote legislation that trumped those efforts and capped bonuses at one-third of executives' salaries. The new law applied only to firms that took bailout funds after Feb. 11.
Dodd's maneuver upset some Obama officials because his amendment and the administration's earlier guidance together curbed pay more than the White House intended. The officials began to worry that firms would drop out of government rescue programs or lose talented employees.
As a result, the administration announced yesterday that most firms receiving federal bailouts will face a limit on bonuses but not on salaries. For companies that accepted less than $500 million, the restriction would apply only to top executives. For those receiving more, the limit would also apply to 20 other top earners at each firm.
The response yesterday from industry and business experts varied widely. Some faulted the government for meddling in the private sector while others said the proposed changes were needed but may not prompt real reform. Rep. Barney Frank (D-Mass.), who leads the House Financial Services Committee, said the measures did not go far enough and plans to introduce legislation directing the SEC to outline guidelines for how compensation committees should determine pay.
Under the Obama plan, members of these committees would not be able to accept fees from their respective firms other than what they make for serving on the panels. Attorneys or consultants that help members in their work must be hired by and report to the committee rather than a chief executive.
Administration officials said they also hoped their efforts would pressure firms to rein in lavish pay by giving shareholders the right to vote on an executive's overall compensation package. This proposal, know as say-on-pay, would be nonbinding.
Some analysts warned that the vote wouldn't be taken seriously by companies because it is only advisory. About two dozen firms allow say-on-pay, and in no case has a proposed pay package been rejected by shareholders. "Will companies treat this as a compliance exercise they're being forced to do or will they embrace the process? It's an open question," said Patrick McGurn, a compensation expert at RiskMetrics, which advises big investors. "We hope it goes into the direction of an annual constructive dialogue on pay issues."
The proposal could give could give large investors such as mutual funds, pension funds and labor union retirement funds greater influence in expressing opinions on compensation. Administration officials said they hope companies will consult investors in designing pay packages.
President Obama proposed legislation to advance say-on-pay when he was in the Senate in 2007, but the bill stalled after facing stiff opposition from the Bush administration and big corporations.
The Obama administration cited Britain's say-on-pay legislation, enacted in 2002, as a model yesterday. A Harvard Business School study of the initiative found this year that it failed to curb pay among top executives at companies but succeeded at pressuring companies to scale back severance packages for executives whose companies fared poorly, according to Fabrizio Ferri, the professor who conducted the study.
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