The Executive Pay Practice Crackdown Continues
Thursday, October 22, 2009SUSIE GHARIB: One hundred seventy five executives at seven of the nation's biggest companies are facing hefty pay cuts tonight. The Obama administration's pay czar Kenneth Feinberg ordered today drastic reductions in the pay packages of senior executives at firms that took government bailout money. He also said cash salaries for the top 25 executives will be limited to half a million dollars and their total compensation will be cut in half.
KENNETH FEINBERG, SPECIAL MASTER, TREASURY DEPT.: I'm hoping that using these seven companies as a template or as a model, that other companies will voluntarily see the wisdom of the way we've structured compensation, less cash, more long-term stock tied to the financial future of these seven companies.
GHARIB: Also cracking down on pay practices today, the Federal Reserve. Fed Chairman Ben Bernanke said he plans to review the compensation practices at 28 large banks and financial firms. He indicated that a one-size fits all approach won't work. Standing by now with more, our Washington bureau chief Darren Gersh. Darren?
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hi Susie. You're right. There was a lot of talk today in Washington about striking the right balance among fairness, risk and pay. The president praised the compensation cuts proposed by administration pay czar Kenneth Feinberg. Mr. Obama says the decision to slash cash payments and switch to long-term stock awards will protect taxpayer investments in everything from AIG to GM. He says Feinberg also sent a tough message on executive pay.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Under these competing interests, I believe he has taken an important step forward today in curbing the influence of executive compensation on Wall Street, while still allowing these companies to succeed and prosper.
GERSH: From Wall Street, the reaction was less generous. Compensation consultant Steven Hall warned the small savings on pay will put at risk much larger taxpayer investments in auto makers and big banks.
STEVEN HALL, MANAGING DIRECTOR, STEVEN HALL & PARTNERS: If I were in one of these companies, I'd be feeling pretty down at this point, because I think it is going to cause some problems not only with individuals in terms of their own cash flows and their own compensation, but it's also going to cause problems with regard to retaining and attracting people.
GERSH: The Federal Reserve also weighed in today with new regulation to bring banking industry paychecks and risk into better alignment. Under the new rules, 28 of the nation's biggest banks will have to submit pay policies for regulatory review. Pay at smaller banks will be checked during regulatory exams. Pay plans for senior executives will be reviewed, but so will those for any employee that takes on huge risks. The Fed wants banks to tie pay to risk so employees are not rewarded for making the kind of short-term, reckless bets that many believe brought on the financial crisis. Banking industry lobbyist Scott Talbot praised the Fed for being tough, but flexible.
SCOTT TALBOTT, SR. VP GOV'T AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: Actually in theory and in practice, the Fed's proposal will reduce compensation by eliminating the elements that still include excessive risk taking. Those elements should be taken out of the compensation structure.
GERSH: While Feinberg's pay cuts generate the biggest headlines, shareholder activist Nell Minow says the Fed is making the biggest difference.
NELL MINOW, EDITOR, THE CORPORATE LIBRARY: In the sub-prime era, we had people getting rewarded based on the number of transactions, rather than the quality of transactions. If the Fed had looked at that, they would have been able to predict the meltdown years before.
GERSH: Late this afternoon many of the companies that took the most government bailout money are saying they have agreed to implement the pay cuts the Treasury is demanding. Susie.
GHARIB: Darren, it looks like from what Kenneth Feinberg is saying that he wants other firms to voluntarily use this model, copy it and come up with their own pay reform. What are the chances of that happening?
GERSH: I don't think they're going to put in place the 50 percent pay cut for their top executives. So I don't think we're going to see that any time soon. There is a trend, renewed trend towards tying compensation to long-term performance, to trying to get some of the risks out of the way that people are compensated so they don't take outsized risk and get paid in the short term for risks that go bad in the long term. So some of that might get adopted across the financial sector.
GHARIB: What I'm finding interesting is that this has stirred up so much debate. And I was talking about this with some business people here in New York. Surprisingly, some thought these measures go too far, not surprising. Others said they don't go far enough. What are you hearing in Washington?
GERSH: Well, the first thing I'm hearing in Washington is that people think that these measures are going to lead to a very rapid payback of the rest of the TARP money. They don't think --
GHARIB: That makes sense.
GERSH: A lot of these financial institutions are not going to want to live under these pay strictures for very long. Washington is conflicted. I think that official Washington doesn't want to be setting the level of overall pay. They feel this issue was kind of forced upon them. But they want to get a better policy in place so that companies will get serious about managing the risk that people are taking on, so they're not taking these huge risks and getting paid for them if the risk -- even if the risk blows up later.
GHARIB: Real quickly Darren, we're running out of time, how do you think the public is going to respond? Are they going to be satisfied by this?
GERSH: In a word no. Polls showed that the bailout is very unpopular, that people are --more than half of all Americans think Wall Street benefited from the bailout and they're not going to be very happy to see these executives are still getting half a million dollars or more a year. Most people don't make that.
GHARIB: That's still a lot of money. Thanks a lot Darren. Washington bureau chief Darren Gersh.
