Government widens control over paychecks - washingtonpost.com

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BAILED-OUT FIRMS ARE FIRST Measures aim to cut risk to companies, economy

By Frank Ahrens and David Cho
Washington Post Staff Writer
Friday, October 23, 2009

The Federal Reserve joined the Treasury Department on Thursday in imposing new limits on executive pay, extending the government's control over compensation at taxpayer-owned companies to institutions that are merely government regulated.

The restrictions were the latest in more than a year's worth of government intervention in matters once considered inviolable aspects of the country's free-market economy and represent a signal moment in the history of the American economic experiment. After years of setting minimum wages, the government is now telling some companies how they should structure pay for those who run them.

The actions Thursday put the United States more in line with European governments. France and Germany, in particular, have pressed for international standards to limit executive pay, a move that the United States and Britain have resisted.

At Treasury, President Obama's pay czar, Kenneth Feinberg, announced sharp cuts in pay for 175 top executives at seven big banks and automakers that received hundreds of billions of dollars in federal bailout money during the financial crisis. The new structures reduced the cash salary paid to some executives by 90 percent and tied more compensation to long-term stock awards.

"There is entirely too much reliance on cash, and there's got to be a better way to tie corporate performance to long-term growth," Feinberg said at a media briefing. "I'm hoping that the methodology we developed to determine compensation for these individuals might be voluntarily adopted elsewhere."

At the Federal Reserve, Chairman Ben S. Bernanke proposed a broader but less proscribed plan to restrict pay at banks. The aim is to prevent them from rewarding employees for actions that could endanger the firms' long-term financial health. Unlike Feinberg's more limited plan, the Fed's guidance would cover all banks it regulates -- even those that never received a bailout -- as well as U.S. subsidiaries of foreign companies.

However, the Fed's proposed rules have wiggle room: The guidelines would let banks set their own compensation but give the Fed veto power over pay practices that it determines could threaten the safety and soundness of a bank. They would extends the regulators' reach into pay practices affecting tens of thousands of bank employees, from senior executives to traders of complex securities.

"I've always believed that our system of free enterprise works best when it rewards hard work," Obama said at the White House on Thursday. "But it does offend our values when executives of big financial firms -- firms that are struggling -- pay themselves huge bonuses even as they continue to rely on taxpayer assistance to stay afloat."

Since the crisis began, the federal government has used taxpayer money to inject capital into financial firms in exchange for ownership stakes. Failing Fannie Mae and Freddie Mac were taken over by Washington. American International Group, the world's largest insurance company, is 80 percent owned by U.S. taxpayers. The government has picked winners (Bear Stearns) and losers (Lehman Brothers). And a sitting chief executive -- General Motors' Rick Wagoner -- was effectively fired by the White House.

Executive compensation has long been linked to company performance -- the higher profits and stock prices go, the bigger the payday for top executives. But Bernanke, other regulators and many on Capitol Hill say that compensation packages were so high that they led executives to put their companies and shareholders at risk solely for the benefit of multimillion-dollar bonuses.

"The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system," Bernanke said.

The banking industry viewed the Fed's guidelines with ambivalence. Many banks already are moving to revise compensation practices for top executives and other employees who could expose the bank to bet-the-company risks. But industry representatives are wary of the regulations, concerned that they could ensnare even relatively low-level employees of smaller banks.

"If it focuses on those who really put institutions at risk, that's fine," said Ed Yingling, chief executive of the American Bankers Association. "But if you get down to the point where you have regulators looking over the shoulders of branch managers, it really does not make sense."

Long-simmering resentment over executive compensation boiled over in March when it was revealed that AIG, the recipient of a taxpayer-fueled bailout package worth up to $180 billion, was paying hundreds of millions of dollars in bonuses to a trading division that nearly brought the company and the global financial system to their knees.

The seven companies included in the Feinberg's cash crackdown are AIG, Citigroup, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial.

The new pay ceilings are low by Wall Street standards, and they are by no means watertight. They still allow for hefty compensation.

For instance: Feinberg reduced the cash salary of 13 top Bank of America executives by $89 million for 2009. But the total compensation for each of the 12 executives beneath outgoing chief executive Kenneth D. Lewis still averages $6.5 million this year. Feinberg's actions do nothing to stop Lewis's $70 million retirement compensation.

And the companies escape the pay curbs if they pay back all of the bailout money they have received.

Still, Feinberg managed to slash about $879 million in total 2009 compensation at the seven companies, compared with 2008 levels.

Sen. Charles E. Schumer (D-N.Y.) said Feinberg did not go far enough. He urged Feinberg to push the government deeper into corporate boardrooms via a number of proposals, such as forcing companies to split the jobs of chief executive and chairman.

Daniel J. Mitchell, senior fellow at the libertarian Cato Institute, says he worries about the slippery slope.

"I fear as politicians get a taste for interfering with executive pay for one little subset of companies where you actually could have sympathy for the approach, what's going to stop them from saying, 'Hey, this was popular. Let's do a little demagoguery before the next election and go after all the CEOs.' "

Correspondent Anthony Faiola in London contributed to this report.

Pay Czar Targets Salary Cuts - WSJ.com

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Top Earners at Firms Getting Aid Would See Compensation Shift From Cash to Stock

By DEBORAH SOLOMON

WASHINGTON -- The Obama administration's pay czar is planning to clamp down on compensation at firms receiving large sums of government aid by cutting annual cash salaries for many of the top employees under his authority, according to people familiar with the matter.

Instead of awarding large cash salaries, Kenneth Feinberg is planning to shift a chunk of an employee's annual salary into stock that cannot be accessed for several years, these people said. Such a move, the most intrusive yet into corporate compensation, would mark the government's first effort to curb the take-home pay of everyone from auto executives to financial traders.

Mr. Feinberg is expected to issue by mid-October his determination on compensation packages for 175 of the most-highly compensated executives and employees at the seven firms he oversees. The companies are: American International Group Inc., Bank of America Corp., Citigroup Inc., General Motors Co., GMAC Financial Services Inc., Chrysler LLC and Chrysler Financial.

The move will further reshape pay at those firms and could complicate efforts by some of those seven companies to attract top executives and employees.

The issue could be particularly acute for Bank of America, which is searching for a successor to Kenneth Lewis, who announced plans to resign as chief executive of the company last week. A Bank of America spokesman said the bank declined to comment on compensation issues regarding the chief executive. "We have been in close communication with Feinberg and our compensation going forward is very much in line with his guidance," the spokesman said.

WSJ's Deborah Solomon details U.S. pay czar Kenneth Feinberg's plans for clamping down on pay, which would focus on cutting annual cash salaries for many of the 175 executives and other employees under his authority.

The Obama administration has tasked Mr. Feinberg with more closely tying compensation to long-term performance, something the White House believes will help prevent employees from taking unnecessary risks for short-term gains. A government official said shifting some salary away from cash and into stock will help achieve those goals.

The move is aimed squarely at salaries, not bonuses, which are restricted under rules passed by Congress earlier this year. Firms receiving bailout funds cannot pay cash bonuses to top executives and employees and must comply with a host of other restrictions, including capping bonus payments at one-third of total compensation

It's not clear what portion of an employee's salary will be diverted to stock but a person familiar with the matter said that in some cases it could be more than 50%. Indeed, Mr. Feinberg employed this strategy in his Oct. 2 ruling on pay for Robert Benmosche, the new chief executive of AIG. Mr. Benmosche's salary was broken into two pieces -- a $3 million annual cash salary and $4 million annually in AIG stock that cannot be accessed for five years.

The Federal Reserve, which is planning to propose risk-based guidelines later this month that would affect the way tens of thousands of bankers get paid, is not expected to adopt Mr. Feinberg's strategy in making its determinations. However, the Obama administration is hopeful that Mr. Feinberg's pay structure will be viewed as something of a "best practice" and that other firms may voluntarily seek to use similar methods in determining compensation.

Andrew Williams, a Treasury spokesman, wouldn't comment on Mr. Feinberg's plans but said the pay czar was appointed "to help ensure that companies strike the right balance around their need to retain talent, reward performance, and protect the taxpayers' investment. Obviously, we all have a shared interest in ensuring that those companies can return to profitability as soon as possible so that taxpayers can recoup their investment."

Mr. Feinberg, an attorney who is receiving no government compensation for his work, has been trying to convey some of his thinking in a series of recent public speeches and interviews. He doesn't plan to set any hard-dollar ceilings for executive pay and said he is sympathetic to the need for companies receiving government aid to pay enough to attract talented employees and remain competitive.

At a speech before the Chicago Bar Association last week, Mr. Feinberg said he will not have done his job if companies react to his decisions by saying "that's great, we're going to lose all our people and we're not going to be competitive."

But at the same time, the administration is under pressure to rein in what many view as excessive compensation at banks and other firms.

Mr. Feinberg has been working closely with the firms and many are aware of his plans regarding salary, people familiar with the matter said. Indeed, in the Chicago speech, Mr. Feinberg said the negotiations have been "a consensual process...I'm hoping I won't be required to simply make a determination over company objections."

—Dan Fitzpatrick contributed to this article.

Write to Deborah Solomon at deborah.solomon@wsj.com

Institute for Policy Studies: America’s Bailout Barons

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Download Executive Excess 2009

By Sarah Anderson, John Cavanagh, Chuck Collins, Sam Pizzigati

The 16th annual Institute for Policy Studies "Executive Excess" report exposes this year's windfalls for top financial bailout recipients.

Ten of the top 20 financial bailout firms have revealed the details of stock options pocketed in early 2009. Based on rising stock prices, the top five executives at each of these banks have enjoyed a combined increase in the value of their stock options of nearly $90 million, according to the report, the 16th in a series of annual "Executive Excess" reports.

"America's executive pay bubble remains un-popped," says Sarah Anderson, lead author on the Institute study. "And these outrageous rewards give executives an incentive to behave outrageously, putting the rest of us at risk."

Key Findings

The Bounty for Bailout Barons: From 2006 through 2008, the top five executives at the 20 banks that have accepted the most federal bailout dollars since the meltdown averaged $32 million each in personal compensation. One hundred average U.S. workers would have to labor over 1,000 years to make as much as these 100 executives made in three.

Layoff Leaders: Since January 1, 2008, the top 20 financial industry recipients of bailout aid have together laid off more than 160,000 employees. In 2008, the 20 CEOs at these firms each averaged $13.8 million, for a collective total of over a quarter-billion dollars in compensation.

Wall Street Pay Dwarfs Regulator Pay: These 20 CEOs averaged 85 times more pay than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corporation. These two agencies, many analysts agree, have largely lacked the experienced and committed staff they need to protect average Americans from financial industry recklessness.

"The lure of lucrative private sector jobs doesn't just siphon off talent from public service," says Sam Pizzigati, an IPS Associate Fellow and report co-author. "It also breeds corrosive and ever-present conflicts of interest: Why 'get tough,' as a regulator, on a firm that could be your future employer?"

Federal Response Falls Short: An eight-page table at the end of America's Bailout Barons tracks the fitful progress in Washington on various executive pay reforms. Several of these have strong potential to deflate the executive pay bubble.

The federal government, for instance, could give tax breaks and federal contracting preferences to companies that maintain a reasonable pay gap between their top executives and workers. Rep. Jan Schakowsky (D-Ill.), in her proposed Patriot Corporations Act (H.R. 1874), would extend these tax breaks and procurement bidding preferences only to those companies that compensate their executive at no more than 100 times the income of their lowest-paid workers.

A generation ago, typical big-time corporate CEOs seldom made more than 30 or 40 times what their workers took home. In 2008, the IPS report shows, top executives averaged 319 times more than average U.S. worker pay.

The bulk of the debate over executive pay reform has revolved around questions of corporate governance, such as the independence of compensation committees and the role of shareholders.

"Governance problems do need to be resolved," notes IPS Director John Cavanagh. "But unless we also address more fundamental questions - about the overall size of executive pay, about the gap between the rewards that executives and workers are receiving - the executive pay bubble will most likely continue to inflate."

"Public officials in Congress and the White House hold the pin that could pop the executive pay bubble," says IPS Senior Scholar Chuck Collins. "They have so far failed to use it."

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