Obama Pay Plan Lacks ‘Meat
on the Bones’ to Trim CEO Paychecks
By Ian Katz
June 11 (Bloomberg) -- The Obama
administration’s pay proposals may lack the “meat on the bones” to
rein in firms accused of overpaying executives.
“A lot of people would have liked
to have seen more meat on the bones,” said
Mark Poerio, a partner focusing on pay at Paul, Hastings,
Janofsky & Walker LLP in Washington. “If companies have been
following the executive compensation debate and development, they
just have to follow through.”
The plan announced yesterday by
Timothy Geithner would require companies to give shareholders
a non- binding vote on pay, without setting limits. Directors who
determine the pay and consultants that advise companies would have
to be more independent from management, Geithner said.
The administration proposal is
aimed at reducing incentives that lead executives to take
excessive risks and quell a political uproar over bonuses paid
managers at companies including
American International Group Inc. that received U.S. aid.
Geithner blamed pay standards tied to short-term profits for
contributing to the worst financial crisis since the 1930s.
“We’re not telling clients to be
prepared for less pay,” said
David Schmidt, a senior consultant for New York-based
James F. Reda & Associates. Forms of payment may be adjusted
as firms give executives additional cash and put some part of
their bonuses in escrow for three to five years, making pay
dependent on long-term performance, he said.
Changing pay practices is part of
an initiative by Obama to overhaul U.S. financial rules. Obama
will unveil specific proposals for streamlining and reorganizing
regulation on June 17, White House Press Secretary
Robert Gibbs said this week.
Overall, pay is declining for the
highest-ranking financial executives. Average compensation for
chief executive officers at the 50 largest financial firms who
were in their jobs throughout 2007 and 2008 fell 25 percent in
2008 to $9.8 million from $13 million a year earlier, according to
data complied by Bloomberg.
The Obama plan also creates a
“special master” to review pay at companies that get U.S. aid.
Kenneth Feinberg will review “the soundness, the
appropriateness” of pay for the top 100 executives of seven
companies that got aid through the Troubled Asset Relief Program,
Gibbs said. Oversight will continue until the aid is repaid “to
protect the taxpayers,” he said.
Separately, Treasury issued pay
restrictions yesterday for recipients of the aid as required in a
bill passed in February. The measure limited bonuses for senior
executives and the next top 20 employees at companies getting more
than $500 million from TARP. The
rules apply to other companies on a sliding scale based on
their level of assistance.
The administration proposal,
which needs congressional approval, would authorize the Securities
and Exchange Commission to require so-called say-on-pay, a
nonbinding shareholder vote on compensation including salary,
bonuses and stock awards for the top five executives at public
Say-on-pay isn’t “the panacea
some people are claiming,” said
Mark Borges, a principal at Compensia Inc., a San
Francisco-area pay consultant. “If you see it as an instrument for
dialogue between the shareholders and the board, then it can be
Steven Hall, managing director at
Steven Hall & Partners LLC, a New York-based compensation
consulting firm, said the vote requirement may complicate pay
decisions. “At what point does a non-binding vote become binding
because you can’t ignore it anymore?” he said.
Under the Obama proposal,
compensation committees will be responsible for choosing and
overseeing pay consultants, which “must report directly” to the
committee, the Treasury said in its statement explaining the
That provision, aimed at
increasing the independence of the panels, “goes a little farther
than where it’s been historically,” said Poerio.
House Financial Services
Barney Frank said yesterday he endorsed the plan while
disagreeing with the administration position on pay committees.
“Given the inherently close
relationship that exists between CEOs and other top executives on
the one hand, and boards of directors on the other, it is very
unlikely that you will ever get the degree of independence that
will allow the boards of directors to be left completely on their
own to set compensation,” Frank said in a statement.
The committee holds a hearing
today in Washington to examine executive pay practices. Witnesses
include Treasury Counselor
Gene Sperling, Fed and SEC officials.
The Federal Reserve is working on
its proposals to make sure firms have the right incentives for
setting pay policies, Fed Governor
Daniel Tarullo said yesterday. Geithner said the Fed and other
bank regulators will define “standards and principles that
supervisors would use to help bring about reforms in compensation
practices in the financial industry.”
To contact the reporter on this
Ian Katz in Washington at
Last Updated: June 11, 2009