The Obama administration struck a delicate balance on executive pay Thursday, blaming flawed compensation packages for encouraging disastrous risk-taking but insisting it doesn't want to dictate how corporations reward their top people.
Gene Sperling, a top counselor to Treasury Secretary Timothy Geithner, conceded to a congressional committee that imposing compensation caps on companies could lead to a flight of talent.
"I can say with certainty that nobody in the Obama administration is proposing such a thing," he said.
Yet, at the same time, he and officials with the Federal Reserve and the Securities and Exchange Commission laid out a case for how payment structures rewarded short-term gains at the expense of long-term performance and contributed to the nation's financial crisis.
The administration plans to seek legislation that would try to rein in compensation at publicly traded companies through nonbinding shareholder votes and by decreasing management influence on pay decisions.
But some Democrats on the House Financial Services Committee said Thursday the administration's efforts to hector the private sector into reforming executive pay might not go far enough.
"I do differ with the administration in that hope springs eternal and their position seems to be that if we strengthen the compensation committees we will do better," said the committee chairman, Rep. Barney Frank, D-Mass.
Rep. Brad Sherman, D-Calif., said that shareholders' votes on pay should be made binding on boards of directors.
Still, Frank made it clear he did not wish to impose pay caps.
"We are not talking here about the amount. We are talking here about the structure of compensation," he said. "And I believe the structure of compensation has been flawed."
While the administration has approached the issue too cautiously for many Democrats, a top Republican said its plans amounted to "incessant government intervention."
"The president cannot continue his heavy-handed meddling in the private sector and expect it to function, much less flourish," said Rep. Tom Price of Georgia, chairman of the Republican Study Committee.
Until now, the attention to executive pay has focused almost exclusively on companies that are receiving assistance under the $700 billion Troubled Asset Relief Program established last fall to address the financial crisis. With those firms, the administration has shown a greater willingness to restrict compensation.
On Wednesday, it set bonus limits on companies that receive TARP assistance, with the toughest restrictions aimed at seven recipients of "exceptional assistance." They are Citigroup Inc., Bank of America Corp., General Motors Corp., Chrysler LLC, American International Group Inc., GMAC LLC and Chrysler Financial.
The regulations followed requirements set by Congress earlier this year when it passed the $787 billion economic stimulus legislation. The regulations will limit top executives of companies that receive TARP funds to bonuses of no more than one-third of their annual salaries. But the administration also went beyond the steps mandated in the legislation.
The administration named Kenneth Feinberg, a lawyer who oversaw payments to families of Sept. 11 victims, as a "special master" with power to reject pay plans he deems excessive at the seven companies with the biggest injections of public money. Feinberg also would have authority to review compensation for the top 100 salaried employees at those companies.
But on Thursday Democrats and administration officials agreed that companies across the private sector need to adjust compensation practices to avoid damaging the economy.
"We believe that compensation practices must be better aligned with long-term value and prudent risk management at all firms, and not just for the financial services industry," Sperling said.
The Federal Reserve, meanwhile, is developing its own set of compensation guidelines for the banks that it oversees. The Fed already has standards for banks that declare that compensation that could lead to material financial losses is considered unsafe and unsound. But regulators are prohibited from using those standards to prescribe specific levels of pay.
The SEC also is considering strengthening its rules, including one that would set new disclosure requirements for shareholders regarding conflicts of interest between compensation consultants and corporate management.
Some firms are already adopting compensation practices that pay greater attention to long-term performance by extending bonuses over a period of time.
"The industry has moved itself quite significantly toward cleaning up that act," said John Benson, CEO of eFinancialcareers.com, a career management firm for financial services professionals. "What the government is doing is putting a voice to that public mood."