By Brady Dennis and Tomoeh Murakami Tse
Washington Post Staff Writers
Sunday, August 9, 2009
President Obama's compensation czar has been meeting for weeks with executives at some of the country's largest and most troubled companies as they face a Thursday deadline to propose how much they will pay their top employees.
Kenneth R. Feinberg has the unprecedented task of deciding executive compensation at seven companies that received large government bailouts. His meetings with American International Group, Citigroup, Bank of America, General Motors, Chrysler, Chrysler Financial and GMAC have been conducted in secret, with neither Feinberg nor the companies willing to say much in public.
But one window into this opaque process is an account provided by people familiar with his discussions with AIG, the crippled insurer that has received tens of billions of dollars in federal rescue money.
Last month, Feinberg's face flashed across the video screens at corporate offices in London, Paris and Wilton, Conn. Over the better part of an hour, AIG employees on both sides of the Atlantic peppered him with questions about their compensation, recalled several people familiar with the videoconference. What could happen to the bonuses they were promised? Would he try to alter their contracts? How would the company's pay structure change?
Some of AIG's highest earners work in these offices, which are home to its financial products division. In March, the division's employees were paid $165 million in retention bonuses, triggering national outrage. More than $200 million more are scheduled to come due in 2010.
After the public uproar this spring, the government brought in Feinberg to help it address -- and defuse -- one of the most politically sensitive issues it faces.
Feinberg, who has sole discretion to set compensation for the top 25 employees of each of those companies, has 60 days to make a determination after the proposals are complete. Under the administration's initiative to curb excessive pay practices, each of the seven companies must also receive his approval for how it pays the rest of its 100 most highly compensated executives and employees. The companies must submit pay plans for these employees by Oct. 12.
With Congress and the public already exasperated by the hefty pay awarded to Wall Street bankers, Feinberg is under intense pressure to put checks on excessive pay. But if he goes too far, the companies he oversees could lose their rainmakers and other key executives to rival firms that are not subject to similar pay restrictions.
"I wish I could hum the theme song for 'Mission: Impossible' because I think his job is mission impossible," said Robert Profusek, a lawyer at Jones Day who has advised major banks on compensation matters. "On the one hand, there's this populist outrage that is fanned every other day by somebody in Washington. . . . But he can't just go in there with a hatchet and cut everything because the good people will leave. That's not in our best interest" as taxpayers.
The seven companies are still finalizing the pay plans due Thursday, and several possible approaches are being discussed, say people with knowledge of the deliberations. All seek to give employees an incentive to care about the long-term health of their company instead of short-term gain. They include extending the time that executives must wait before cashing in on restricted stock awards, boosting the proportion of pay that comes in the form of company stock, and adding stronger clawback provisions that allow firms under certain conditions to take back compensation they've already paid.
During the videoconference with AIG employees, Feinberg mostly avoided giving them detailed answers to their questions. Many of the employees left frustrated because he gave them no sense of whether he would seek to modify contracts that promise them upcoming bonuses, said people familiar with the session.
Legally, Feinberg cannot prohibit bonuses that were promised before the February passage of the stimulus bill, which included new compensation restrictions for companies receiving government rescue funds. That includes, for example, retention payments to AIG employees. He could try to renegotiate those bonuses if he thinks they're against the public interest, according to the rules on new compensation.
He could also take these bonuses into account when evaluating an employee's overall compensation package. For example, if a company proposes giving an executive $1 million in compensation and a $500,000 bonus later this year, Feinberg could subtract the $500,000 from the proposed pay package, in effect negating the bonus.
Even for Feinberg, who oversaw the complex process of paying compensation to victims of the Sept. 11, 2001, attacks, this latest mission is a delicate balancing act.
Senior Treasury Department officials say they do not want Feinberg to set precise prescriptions for how companies compensate employees. Instead, his task is to evaluate pay according to several principles. For instance, does an employee's compensation reward short-term, risky business behavior? Or, on the contrary, is the compensation tied to longer-term performance goals? Does it allow the company to remain competitive and recruit top talent?
Already, banks such as Goldman Sachs, which recently returned its bailout funds to the government, have set aside enough money that they could resume paying year-end bonuses on the same scale as they did before the financial crisis. That has boosted Citigroup and Bank of America's argument that they must be free to keep their pay competitive.
Further complicating Feinberg's mission is the assortment of companies under his watch. They include banks, financing firms and automakers, and the industries traditionally pay their executives differently. For each company, he will have to assess the role individual employees play and their ability to generate revenue.
During their discussions, Feinberg has yet to provide executives with a clear sense of how he plans to evaluate their pay proposals. While the pay packages will become public information, the companies have been reluctant to divulge details as they negotiate with Feinberg.
Bank of America said it was "taking the steps necessary to attract and retain key talent and respond to competitive pressures" and that it was looking forward to "working cooperatively with Mr. Feinberg to ensure we comply with all applicable compensation regulations outlined by the Treasury."
Citigroup and AIG declined to comment.
Gina Proia, a spokeswoman for GMAC, said the company was "working with the appropriate officials, and obviously attracting and retaining key talent is critical."
GM spokesman Tom Wilkinson said that traditionally the pay packages at the carmaker "have not been particularly rich." He added, "We're very sensitive to trying to make the relationship with the government a mutually beneficial one."
Chrysler Financial, meanwhile, said it was working with Feinberg to "seek advice and input with regard to our compensation plans." A Chrysler spokeswoman said the company did not want to discuss the package it was putting together for Feinberg.
On Thursday, Feinberg should have seven proposals on his desk, each with its own set of potential land mines.
"You've got to allow these companies to make the money for the shareholders," said Linda Rappaport, head of the executive compensation practice at the firm Shearman & Sterling. "And to make the money for the shareholders, they have to have the talent. And to have the talent, they have to be able to pay them competitively."