Talking tough but stepping gently, the Obama administration rejected direct intervention in corporate pay decisions Wednesday even as officials argued that excessive compensation in the private sector contributed to the nation’s financial crisis.
Instead, the administration plans to seek legislation that would try to tame compensation at publicly traded companies through shareholder pressure and less management influence on pay decisions.
At the same time, the administration drew a sharp line between the overall corporate world and those institutions that have tapped the government’s $700 billion Troubled Asset Relief Program.
The administration issued new regulations Wednesday that set pay limits on companies that receive TARP assistance, with the toughest restrictions aimed at seven recipients of “exceptional assistance.” Those firms are Citigroup Inc., Bank of America corp, General Motors Corp, Chrysler, American International Group Inc., GMAC LLC and Chrysler Financial.
The regulations limit top executives of companies that receive TARP funds to bonuses of no more than one-third of their annual salaries.
But in a significant expansion of authority, the regulations call for a special compensation overseer who will burrow into the pay practices of some of the country’s biggest enterprises.
The administration named Kenneth Feinberg, a lawyer who oversaw payments to families of victims of the Sept. 11, 2001, terrorist attacks, 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 firms.
The tempered broader approach to executive pay wasn’t immediately embraced on Capitol Hill, where a leading Democrat said he wants to go farther.
In a lengthy statement released after the White House announcement, House Financial Services Committee Chairman Rep. Barney Frank said he wants legislation that would instruct the Securities Exchange Commission to ban company boards from rewarding excessive risk taking.
“It is not the government’s business to discourage risk taking,” said Frank, D-Mass. “But neither should we allow systems which have existed up until now whereby decision-makers are handsomely rewarded if they take big risks that pay off, but suffer no penalty whatsoever if those risks result in losses to the company.”
With one set of policies for taxpayer-assisted firms and a more hands-off approach to the rest of the corporate sector, Obama is straddling what has been an explosive issue with the public and in Congress. Executive pay burst as an issue earlier this year amid disclosures that AIG, the insurance conglomerate, had paid bonuses of $165 million even as it accepted billions from the government.
AIG is among the companies whose pay schemes the government will now oversee. But outside in the broader private sector, the administration chose to use public pressure and the potential for embarrassment, rather than direct pay restrictions.
“We do not believe it’s appropriate for the government to set caps in compensation,” Treasury Secretary Timothy Geithner said. “We’re not going to prescribe detailed prescriptive rules for compensation. All those things would be ineffective, could be counterproductive in some ways.”
Geithner said the administration will ask Congress to give shareholders a nonbinding voice on executive pay and to require corporate compensation committees to be independent from company management. That second provision would give the SEC authority to strengthen the independence of panels that set executive pay.
“We’d like to see better transparency and accountability, frankly,” of executive pay practices, Geithner said.
Geithner said the administration’s legislative proposals would reinforce administration compensation guidelines that encourage corporate boards to adopt pay packages that reward long-term performance rather than short-term gains and to better manage the relationship between risk and incentive. Those guidelines, or principles, are not enforceable but are meant as a message to corporate boards and to shareholders.
With that policy, the administration appeared to be heeding the concerns of the financial sector.
“There is recognition that if you accept government money, you should be subject to restrictions,” said Scott Talbott, the senior lobbyist for the Financial Services Roundtable, an industry group. “Our concern is the government should not set specific dollar amounts and should stick to principles and guidelines, which I believe they will.”
So-called shareholder “say on pay” legislation cleared the House in April 2007 by a 2-to-1 margin but went nowhere in the Senate. It was opposed by the Bush White House and most Republicans.
Investor advocates, union pension funds and shareholder groups have pushed for the legislation. Critics, such as the Center on Executive Compensation, argue that “say on pay” would trivialize corporate governance and would give shareholders a voice even though they are not privy to information before the board of directors.
As a senator in 2007, President Barack Obama introduced a bill to require companies to allow nonbinding shareholder votes on executive compensation packages, though his proposal wouldn’t have limited CEO pay.
During the presidential campaign, Hillary Rodham Clinton also proposed a measure to give shareholders a nonbinding vote on executives’ pay packages. In addition, her bill would have required top executives who collect large performance-based pay packages to return the money if financial irregularities are discovered and companies are forced to restate their earnings. It also would have capped the amount that top executives could earn tax-free through deferred compensation.