Can W.H. Clean up Executive Pay Mess?

Pay restrictions may be a lose-lose proposition

By Lisa Lerer and Victoria McGrane
|  Monday, Aug 24, 2009  |  Updated 3:00 AM CDT
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Blame Them For Your Empty Wallet

AP

Kenneth Feinberg has an unenviable job as pay czar.

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Executive compensation may be the problem the White House can’t fix. 

Nothing spurs public outrage like Wall Street bonuses and huge payouts to banking execs whose risk-taking behavior helped contribute to the nation’s economic woes.

But executive compensation experts warn that the public’s desire to crack down on outsized bonuses could conflict with the need — greater now than ever — to keep companies competitive.

And no one is feeling that conflict quite as much as Kenneth Feinberg, the Treasury Department czar who know finds himself stuck between a bonus and a brouhaha.

“They put him in an impossible position,” said Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware. “I wouldn’t take that job if my life depended on it.”

Last week, seven companies receiving billions in government funds submitted to Feinberg their compensation plans for their top 25 employees. He has two months to decide exactly how much those executives should be making.

If Feinberg slashes their pay, the Obama administration could bear the blame for any downturn at the companies, who will argue that the salary cuts pushed away their biggest rainmakers.

But a more middle of the road approach — like the ones advocated by executive compensation experts — won’t deliver the type of economic retribution craved by voters tired of suffering while they watch Wall Street profit.

“Politically, there are a lot of miles to be gained here,” said a financial services lobbyist. “Whatever the administration does, there will be those who will try to make political hay out of it.”

While there’s been less public attention on executive pay since the outcry last March about $165 million bonuses paid by mega-insurer American Insurance Group, administration officials fear that the issue could flare back up at any time. Many on Wall Street still see no problem offering huge pay packages, say Treasury aides, despite the shame campaign waged by Congress and the White House.

Indeed, guaranteed multimillion dollar payments, untethered to company performance, are making a resurgence on Wall Street.

Perhaps no one embodies the administration’s conundrum on the issue more than Andrew Hall, the head of Citigroup’s profitable Phibro energy trading unit.

Hall stands to make a $100 million cash bonus this year, and last week Citigroup lobbied for an exemption from pay limits in the hopes that he’ll get it. The company is worried that it will lose Hall and other Phibro traders to competitors if it can’t pay out hefty bonuses. 

But Hall is an easy target for populist rage. In a country where median annual income is about $50,000 — and the unemployment rate is over 9 percent — Hall is living large with a 1,000-year-old castle and a world-class art collection. And pay experts say highly paid execs like him aren’t just going to walk away from it all voluntarily out of a sense of sympathy or shame.

“Would you be willing to suffer the embarrassment for $100 million?” asked Frank Glassner, managing partner at Veritas Executive Compensation Consultants LLC in San Francisco. “The answer is going to be yes every single time.”

Hall’s contract is grandfathered under the TARP rules, so there’s not much Feinberg or the Obama administration can do about it directly. But with a say over what other execs at Citigroup make, Feinberg has plenty of leverage over the company, and could apply pressure indirectly to get it to trim Hall’s package.

Feinberg and his staff have spent weeks meeting with lawyers from Citigroup and the six other companies — AIG, Bank of America, Chrysler Financial, Chrysler Group, General Motors Corp. and GMAC Inc. — trying to sort out situations like Hall’s and asking the companies to voluntarily tie pay to long-term shareholder value and return on the government funds.

Now, his team has 60 days to reject or accept the plans submitted by the companies. While he can’t meddle with existing contracts signed before Feb. 11, 2009, Feinberg is authorized to “claw-back” some of the compensation from firms that got government bailout funds. That power could extend to firms like Goldman Sachs, which already repaid its $10 billion of bailout money.

"I have the discretion, conferred upon by Congress, to attempt to recover compensation that has already been paid to executives not only in these companies, but in any company that received federal assistance," Feinberg said during remarks made over the weekend in at a public speech in Martha's Vineyard.

“My prediction is that he’s going to approve some numbers that many people in the public will think are too large because top executives at these huge companies tend to make big money,” said Laura Thatcher, head of Alston & Bird's executive compensation practice in Atlanta.

The White House said that it would like executives to be compensated according to how much value they provide to their companies — and not for “reckless risk-taking.” 

“I don't think the American people begrudge that people make big salaries, as long as they're not jeopardizing the good will of the public in doing so,” said White House press secretary Robert Gibbs. 

Last week, House Speaker Nancy Pelosi and Financial Services Chairman Barney Frank (D-Mass.) sent a letter to Treasury Secretary Tim Geithner, expressing alarm over reports that some TARP recipients planned to hand out more than $32 billion in bonuses payments while still owning more than $200 billion to taxpayers. 

“We expect all compensation decisions to take into account any excessive bonuses already paid to executives by companies that still have outstanding obligations to the taxpayer,” Pelosi and Frank wrote. “To do otherwise would place the benefits accrued as a result of the taxpayer assistance in the hands of executives instead of the taxpayers.”

Before leaving for its August recess, the House passed legislation, 237-185, that not only would give shareholders say on pay but also would require banks, financial advisers and other financial firms to disclose their bonus plans to federal regulators, who would have the power to ban compensation packages they believe would encourage “inappropriate risks” by firms or employees.

And even on recess, House Democrats are trying to capitalize on the populist anger over executive compensation — and use it to their advantage on health care reform. On Tuesday, the House Committee on Energy and Commerce Dozens requested compensation records about dozens of the executives at the country’s largest insurance firms.

It remains unclear what the Senate will do about executive compensation, although Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) intends to address the issue in a regulatory reform package this fall.

An advocacy group for the “average retail investor” — ShareOwners.org — is organizing a Web campaign to pressure the Senate to pass a bill similar to the House measure. It hopes to generate 50,000 e-mails.

“It is apparent from the return of bonus fever that once again is gripping Wall Street that too many American corporations are ready to shrug off the lessons that should be learned from the current financial crisis and economic downturn. Now that the U.S. House has acted, the Senate must follow suit to ensure that shareowners — the individuals and institutions that own America's publicly traded companies — can speak up on executive compensation through say on pay resolutions,” reads the sample e-mail supporters are asked to send.

Wall Street balked at the House bill, which officials say is too invasive. Republicans likened it to setting wage controls on private sector workers. And executive compensation experts say the most effective way to change pay is to empower independent boards of directors.

“Those are the only people on the ground in the company representing the people with the most to lose,” said Elson. “[The politicians] are making political judgments rather than the real judgments needed to solve the issue.”

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