Obama's pay plan doesn't
go far enough
Observers say President
Obama's new rules to limit executive compensation won't put a stop to
Barr, senior writer
Last Updated: February 4, 2009: 6:02 PM ET
Some say President Obama's
executive pay restrictions don't go far enough.
(Fortune) -- President Obama's plan to limit executive pay at firms getting
government funds may calm some angry voices on Capitol Hill.
But pay caps alone won't fill
the accountability deficit that has fueled runaway executive compensation
and other corporate excesses.
Obama unveiled the plan -
which would prohibit firms getting emergency aid from paying top execs more
than $500,000 annually in cash - at the White House Wednesday morning. He
did so as legislators, incensed by reports of rich pay and outlandish perks
at firms that would have collapsed without taxpayer help, have been
"In order to restore our
financial system, we've got to restore trust," Obama said. "And in order to
restore trust, we've got to make certain that taxpayer funds are not
subsidizing excessive compensation packages on Wall Street."
But while the Obama approach
may bring some financial industry salaries down from the stratosphere,
skeptics say it doesn't go far enough. What's more, they say, compensation
limits don't address the festering accountability problem behind surging
executive pay and the recent collapse of the financial sector.
"This plan doesn't look very
meaningful," said Simon Johnson, a former chief economist at the
International Monetary Fund who is now a professor at MIT's Sloan School of
Management. "The issue at these companies is the lack of effective owners,
and things like pay limits don't change that."
A common problem at companies
that have received emergency aid from the government - from financial firms
like AIG (AIG,
Fortune 500), Bank of America (BAC,
Fortune 500) and Citigroup (C,
Fortune 500), or automakers such as GM (GM,
Fortune 500) - is that corporate boards failed to guide or rein in
management, Johnson said.
That's the case because the
boards were more responsive to management than to their true masters, the
shareholders - which now include taxpayers.
"Executive pay has been a
symptom of a much broader problem," said Richard Ferlauto, the director of
corporate governance and pension investment at AFSCME, the biggest U.S.
union for public employees and health care workers. "You've had weak boards
and out-of-touch leaders, and what you've gotten for it is a banking
business model that imploded."
Ferlauto's union has been
among the most forceful advocates of "say on pay," the nonbinding
shareholder votes that give investors a voice on whether companies are
paying their execs too much.
The Obama plan would force
firms receiving emergency aid to conduct such votes, and would permit some
recipients of other funds to skirt the $500,000 annual cash pay cap by
holding such a vote.
But if the idea is to pressure
CEOs into cutting their own salaries, count Ferlauto as a skeptic.
"I don't think you can rely on
shame," he said.
Ferlauto stresses that
attaching strings to federal funds are only the beginning of what must be
far-reaching corporate governance reform.
"You can't do reform in a
piecemeal process," he said. "Shareholders should be treated no differently
from taxpayers. The perverse pay incentives we have in this country need to
be turned on their head."
Some of the new rules lack
There are also those who
question whether the government's good intentions will translate into useful
For instance, the Obama plan
expands the number of executives subject to so-called clawback restrictions,
which would force them to repay the company if they're found to have
knowingly engaged in financial misstatements, from five to twenty-five.
But Gary Lutin, a former
investment banker who runs the Shareholder Forum investor advocacy group in
New York, said this provision is rendered largely moot by the need to prove
an executive guilty of criminal conduct before recovering any funds.
He also questions the wisdom
of a provision that would force corporate boards to define a company policy
"relating to approval of luxury expenditures."
While the clause likely came
into existence thanks to the freewheeling office redecorating of former
Merrill Lynch chief John Thain - he spent $87,000 on a rug and $35,000 on a
toilet when joining Merrill at the end of 2007 - Lutin said the act of
piling on restriction after restriction only feeds the lawyerly mentality
that has made many corporate directors so ineffectual.
"Putting a cap on pay or
requiring board approval of luxury wastebaskets may help get a politician
elected," said Lutin. "But what really matters is basic responsibility - so
it doesn't do any good if executives can simply relabel their bonuses as
'retention incentives' or persuade the board the wastebasket will enhance
Johnson, the MIT professor who
writes on the financial crisis at his
blog, said a better approach for Obama would have been to set pay at firms
receiving emergency aid even lower - say, on par with the civil service pay
That way, he said, skilled
employees would leave to work elsewhere in finance or hang out their own
shingles, and less skilled workers would find a new vocation. The ultimate
goal, he said, should be to create incentives that lead to the orderly
breakup of the dysfunctional giant financial firms.
"They don't get restricted
stock in the civil service," said Johnson. "Why should they get it at these
February 4, 2009: 3:31 PM ET
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