Pay czar widens review of executive pay at banks

By Zachary A. Goldfarb and David Cho
Washington Post Staff Writer
Tuesday, March 23, 2010; A13

The government's point man on executive compensation is broadening his review of how Goldman Sachs, Morgan Stanley and hundreds of other banks compensated top executives during the height of the financial crisis in 2008, and he may seek to have bonuses and other compensation repaid, according to government officials familiar with the review.

Kenneth R. Feinberg, the special master for compensation, is slated to send a letter on Tuesday, asking for details about compensation to top executives, to 419 banks that received assistance as part of the Treasury Department's financial rescue program.

The letter could presage a test of the government's ability to use moral suasion to encourage executives to return paychecks that might fuel public resentment.

Feinberg does not have the power over bonuses paid at the end of 2008. That's because his authority over compensation starts at Feb. 17, 2009 -- the date that President Obama signed into law the $787 billion stimulus package that also granted Treasury the power to shape compensation at places that took a bailout.

However, Feinberg could use the bully pulpit if he deems compensation to have been excessive during the period starting when firms first received taxpayer aid in October 2008 and until the passage of stimulus legislation.

The criteria for deciding excessive compensation is vague -- it must be "contrary to the public interest," according to the guiding law. Feinberg hasn't yet decided what parameters to use.

The "look back letter" from Feinberg, as required by law, will give companies 30 days to furnish the requested information. It concerns only executives who earned more than $500,000 during the four-month period under examination.

Industry representatives said they did not expect to clash with Feinberg over the new pay review. Banks "will work with Mr. Feinberg to demonstrate that the industry has eliminated pay practices that encouraged excessive risk-taking," said Scott Talbott, senior vice president with the Financial Services Roundtable, which represents the largest banks.

The issue of executive compensation has become a lightning rod on Capitol Hill and around the country; public anger surged against Wall Street firms paying hefty compensation packages to employees despite needing taxpayer aid.

Feinberg has been trying to use his role as pay czar not only to limit what he deems excessive pay but also to encourage pay structures that reduce incentives for risk-taking and that tie compensation to long-term performance.

Until recently, Feinberg has focused his attention on seven of the biggest bailout recipients, for which he slashed compensation by about 50 percent last fall. Two of those recipients, Citigroup and Bank of America, have since repaid government aid and largely escaped his oversight.

At American International Group, Feinberg was able to pressure employees to return parts of their compensation over which he did not have authority by threatening to limit future pay.

Banks experienced massive losses in 2008, which limited the size of bonuses and other incentive pay for many executives. But in evaluating whether individual banks' pay practices were reasonable, Feinberg needs to differentiate the institutions, said James Angel, a finance professor at Georgetown University's McDonough School of Business.

"On one hand, some of these banks were effectively forced to take TARP money," said Angel, who has studied executive compensation. "But you could also argue that the executives of surviving banks should not be compensated highly because it wasn't really their particular skill, it was their luck that they were in an institution that survived when the government bailed out the financial system."

Separately, Feinberg on Tuesday is scheduled to release his 2010 compensation decisions for the five remaining firms that received significant government bailouts -- AIG, General Motors, GMAC, Chrysler and Chrysler Financial -- but have not fully repaid that federal aid.

Staff writer Neil Irwin contributed to this report.

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