The Obama administration outlined its new
approach to executive pay Wednesday, with tough restrictions on firms
receiving large amounts of government aid, but only suggested guidelines
for most other companies.
Compensation consultants said the moves may
prompt sighs of relief from many executives, but also could leave them
frustrated by the lack of specifics.
"While they represent admirable goals … how
do you actually translate these principles into workable programs?" asked
Mark Borges, a principal at Compensia Inc., a pay consulting boutique in
San Jose, Calif.
He and others said the guidelines, which
aim to encourage companies to base pay on long-term value creation rather
than stock price, are likely to intensify a debate about how to motivate
executives and what constitutes "excessive" risk.
Mr. Borges says companies' – and
regulators' – understanding of the relationship between compensation and
excessive risk-taking remains fuzzy. "The government today is really
saying that [risk] needs to be part of the equation," he says. "We just
don't have a whole lot of data … [or] experience yet."
The new approach is "a win for most
affected businesses,'' predicted Steve Hall, a managing director of Steven
Hall & Partners, an executive-pay consultancy in New York. "They're going
to be able to attract and retain talent without artificial limits on how
they pay people.''
He expects financial-service firms to
continue offering executives restricted shares without performance
triggers, a popular industry practice. Mr. Hall expects fewer companies to
provide "golden parachutes" or supplemental pensions for departing
executives. But he said some companies dropping supplemental pensions may
grant executives extra cash or stock "to make up for the difference.''
Mr. Hall and others expect the seven
companies receiving "exceptional assistance" from the government to face
big challenges recruiting and retaining executives. Kenneth Feinberg, the
administration's new pay czar, will have authority to review, reject and
even set pay for the top 100 earners at those companies: American
International Group Inc.,
Bank of America Corp.,
Citigroup Inc., General Motors Corp., GMAC LLC, Chrysler LLC and
Among other things, Mr. Hall anticipates
many of these companies will eliminate retention bonuses and exit
packages. More top executives "will be pushed out with no severance,'' and
others will quit because "they aren't used to this level of oversight
[and] limitations on their pay,'' he suggested.
Don Delves, a Chicago-based compensation
consultant, said the rules encourage recipients of government aid to repay
it as quickly as possible, to escape the tough compensation restrictions.
"The only thing you can pay people for is
paying back the government," he said.
But Mr. Delves said the Obama
administration's guidelines may be felt far from the financial sector.
"The rest of the business community is going to read this and take
notice," he says. "I promise you that compensation committees around the
country are going to look at these and say, 'Gee, these are interesting.'"
Mr. Delves said the guidelines will prompt
more boards to discuss risk management in compensation packages and
eliminate rich severance packages and golden parachutes.
Some union shareholder activists applauded
the broad principles – as long as the administration's related legislative
initiatives become law. "With greater investor power and greater authority
within the [Securities and Exchange] Commission, the principles are
appropriate and will be effective,'' said Richard Ferlauto, director of
corporate governance and pension investment at the American Federation of
State, County and Municipal Employees union.
Mr. Ferlauto also praised the
administration's proposed legislation to give the SEC power to require
advisory votes on executive pay as well as greater independence of board
compensation committees. Together, such legislated requirements "will go a
long way toward moderating pay,'' he said.
Treating bank executives' pay in a vacuum
will not cure the problem of excessive risk-taking – and may prove
counterproductive, says Lucian A. Bebchuk, a Harvard Law School professor
and director of its corporate-governance program. He says the highly
levered structure of financial-services firms gives executives the
possibility for big gains, without much risk. Mr. Bebchuk said encouraging
grants of restricted stock and shareholder votes on compensation packages
may exacerbate the problem.
Write to Cari Tuna at
and Joann S. Lublin at