Executives Unruffled by Proposed Compensation Rules
Friday, June 12, 2009
NEW YORK, June 11 -- Corporate executives breathed a sigh of relief Thursday after examining the fine print on broad new executive compensation rules and proposals put forth by the Obama administration.
While the White House's new so-called special master for compensation, prominent Washington lawyer Kenneth R. Feinberg, has been given unprecedented powers to set pay at seven of the most troubled firms, the plan that was laid out Wednesday largely maintains the status quo for compensation practices at all other publicly traded companies, including hundreds that are receiving taxpayer assistance. In addition, the administration got rid of a previously announced $500,000 salary cap at financial firms that in the future take the kind of exceptional assistance that firms such as Citigroup and Bank of America have received.
"Our people kind of thought it was a non-event," one executive of a large bank said. "There's nothing in there that's radical. It's not like the horrible and unethical action from Congress where they were putting artificial caps on pay or trying to steal back bonuses. . . . I don't think there are worries about it on Wall Street."
Still, the rules include some measures that activist shareholders have pursued for years. For example, all companies receiving taxpayer assistance will be prohibited from paying executives' state and federal taxes related to perks and golden parachutes. The unexpected ban on the controversial and widespread practice, known as tax gross-ups, was applauded even by pay watch groups who criticized the administration's broader approach to compensation.
"They're still allowing a lot of loopholes, but it was nice to see," said Sarah Anderson, a director at the Institute for Policy Studies in Washington. Tax gross-ups "was always one of the most obnoxious perks. At least these guys will have to pay taxes like the rest of us."
The rules come as the administration tries to address the public uproar that erupted earlier this year over Wall Street firms that paid out billions of dollars in bonuses despite receiving billions in government aid.
On Wednesday, Treasury Secretary Timothy F. Geithner proposed two pieces of legislation aimed at increasing oversight of executive pay packages. The administration also released much-anticipated guidelines that clarified strict executive compensation rules passed by Congress in February as part of the 1,073-page stimulus bill.
The actions by the administration on Wednesday make clear its discomfort in mandating what the private sector can pay its employees. Instead, the administration, believing that the financial crisis was partly fueled by poor compensation practices, is seeking to put in place rules that would discourage risk-taking and incentives that would link pay to long-term performance, Gene Sperling, counselor to Geithner, said in congressional testimony yesterday.
"The administration certainly saw a linkage between the formulation of executive compensation and how that promoted excessive risk in the financial sector -- they were focused on that," said one person who attended a 75-minute meeting with top regulators and pay experts at the Treasury Department on Wednesday where Geithner discussed broad principles that would guide the administration in regulating pay.
"The focus was really on a light touch approach," the person added, speaking on condition of anonymity because the discussions are ongoing. "Nobody said the government needs to regulate with a heavy hand, like caps or micromanagement, but that investors needed more tools to increase disclosure and director accountability."
The most controversial provision in the Dodd amendments, as the compensation restrictions in the stimulus bill are known, is the limit on bonuses to a third of overall pay for the most highly compensated employees. That is still in place for the roughly 350 financial institutions receiving funds from the Troubled Assets Relief Program.
But the guidelines issued Wednesday for the most part resolved a major source of concern for financial firms that had lobbied fiercely for a favorable interpretation of the Dodd amendments. Treasury clarified the language so that commissions paid to employees for investment management services to clients did not fall under the definition of bonuses. Executives had complained that limiting bonuses, which make up the bulk of annual pay for Wall Street employees, would cause their best traders to flee to foreign rivals and hedge funds. Top traders can take home seven-figure pay packages that exceed those of senior executives.
"They addressed a lot of the concerns we had," said one industry source. "It doesn't hit the top traders we were worried about." Referring to Feinberg, this person added, "The special master will look at their pay structure. So they may not be able to keep it if he decides you're taking risky bets and driving the company to the ground."