The Obama administration's "pay czar" is embarking on a review of proposed compensation packages for the top employees at seven companies that are on government life support, marking the first time a federal official will have veto power over how much private-sector executives are compensated.
Kenneth Feinberg, who ran the government's fund for families of the victims of the Sept. 11, 2001, terrorist attacks, has 60 days to approve or reject the compensation plans submitted this week from bailout recipients. They include American International Group Inc. and General Motors.
He is expected to complete his review by late October, although Treasury spokesman Andrew Williams said Friday that the 60-day clock will not start until Feinberg makes a determination that a company's submission is "substantially complete." He said it could take some days if not weeks for Feinberg to make that determination for each of the seven companies.
Friday was the last day the companies could submit proposed pay packages for their 25 highest earners. Feinberg is expected to negotiate the packages with the companies and will also approve broader compensation formulas that will apply to the 75 next-highest-paid workers at each company.
Feinberg will have a difficult balancing act: He faces pressure to curb diamond-studded compensation packages that have led to public outrage. At the same time, he must ensure that financial institutions and car companies can keep talented executives needed to steer them clear of government assistance. Free market advocates, meanwhile, fault the government's role in overseeing the private compensation.
"In our country's heritage, we do not look kindly on the federal government insinuating itself into the private marketplace and micromanaging these companies," Feinberg told National Public Radio in June. "On the other hand, there's this populist sentiment today that there was excessive compensation paid to high-level company officials."
Compensation experts say Feinberg will likely seek changes that would align pay packages with executives' performance.
The updates could include disbursing executive pay over a few years so the long-term results of their decisions become clear, allowing banks to revoke some of that pay if the bankers' bets go bad, or having them pay more compensation in restricted stock — which can rise and fall in value based on a company's performance — and less in cash.
"He needs to find a way to review those executive compensation packages from the perspective of the long-term and this is very, very difficult for an outsider," said George Tsetsekos, dean of Drexel University's LeBow College of Business.
Feinberg has been consulting with the companies that have received "exceptional assistance" from the government. Besides AIG and General Motors Co., they include Bank of America Corp., Citigroup Inc., GMAC Inc., Chrysler Group LLC and Chrysler Financial. The companies owe more than $200 billion in federal assistance.
The companies have said little about the process. GM spokeswoman Julie Gibson said the company believes "our compensation is within the rules. We've submitted everything they've asked for. We're waiting to get their feedback."
GMAC said earlier in the week that it was working with Treasury on the compensation proposal and "attracting and retaining key talent is critical toward continuing our efforts to transform the company and restore profitability."
Congress will be watching. House Speaker Nancy Pelosi, D-Calif., and Rep. Barney Frank, D-Mass., told Treasury Secretary Timothy Geithner in a letter Wednesday that they were concerned about reports that some bailed-out firms had offered substantial bonuses in 2009.
Pelosi and Frank, chairman of the House Financial Services Committee, said the bonuses "appear to foster the same business behavior that created irresponsible risks but insulated executives from the consequences of their bad decisions. This dangerous imbalance between rewarding risk and forgiving mistakes is what Congress and the American people are determined to bring to an end."