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Administration Proposes New Steps to Regulate Executive Pay

June 10, 2009 at 6:15 PM EST
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The Obama administration outlined a plan for new executive compensation regulations Wednesday, putting the politically charged issue of executive pay back in the spotlight. Analysts examine how more oversight will affect the industry.
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JUDY WOODRUFF: The politically charged issue of executive pay has been front and center since the bailouts began last fall.

U.S. PRESIDENT BARACK OBAMA: That is the height of irresponsibility. It is shameful.

JUDY WOODRUFF: That’s the president responding to news soon after he took office that some Wall Street firms that helped lead the economy into freefall paid out more than $18 billion in bonuses last year.

Whether and how to react to the pay issue has been the subject of internal administration discussion and previous attempts to tame compensation.

Today, Secretary of the Treasury Tim Geithner announced two initiatives aimed at executive pay. One proposal, dubbed “say-on-pay,” would authorize the Securities and Exchange Commission to require companies to hold nonbinding shareholder votes on executive pay packages.

A second plan would give the SEC authority to ensure the independence of compensation committees that set pay for executives at some firms.

TIMOTHY GEITHNER, Treasury secretary: We’d like compensation practice to better reinforce, be better aligned by sensible risk-management practice. And we’d like to see better transparency and accountability, frankly, about compensation practices.

JUDY WOODRUFF: But Geithner had as much to say about what the government was not proposing to do. In contrast to its own earlier proposals, the administration seemed to back away from setting limits on pay at $500,000 for some executives.

TIMOTHY GEITHNER: We are not proposing ongoing government role in setting policy on compensation. We do not believe it’s appropriate for the government to set caps on compensation.

JUDY WOODRUFF: Congress passed limits on executive compensation as part of the stimulus bill in February over the objections of the Obama White House, but those limits affect only companies taking federal bailout money after February.

Weeks later, the administration found itself embroiled in controversy: The bailed out insurer AIG paid $165 million in bonuses, sparking widespread public and political fury.

BARACK OBAMA: How do they justify this outrage to the taxpayers who are keeping the company afloat?

JUDY WOODRUFF: Today, in conjunction with the other proposals, the administration appointed a special master to oversee the compensation packages for highly paid employees at more than 80 firms that have received federal money.

The special master is Kenneth Feinberg, a Washington attorney known for setting the compensation for 9/11 victims’ families. He will be empowered to set the pay for executives at seven firms, including AIG, Bank of America, Citigroup, and the automakers.

Reactions to the compensation czar

James Reda
Compensation consultant
I think it's the worst of four evils. I certainly think it's a better idea than having a pay cap, than having a formula, than having a 90 percent tax rate for those that make over a certain amount.

JUDY WOODRUFF: We get some reaction now to the proposals. It comes from Thea Lee, policy director for the AFL-CIO, and James Reda, he runs an executive compensation consulting firm in New York City and he's written several books on the subject.

Thank you both for being with us.

Thea Lee, I'm going to start with you. Two different steps for the administration; let's take the special master first. This is -- they've appointed a man who will oversee compensation packages for highly paid employees at these firms that took large infusions of government money. Good idea?

THEA LEE, chief international economist, AFL-CIO: Yes, I think that's an excellent idea, that we'll have somebody who's got a lot of authority and some expertise to have some oversight over the pay packages at these companies that are getting government funds.

JUDY WOODRUFF: James Reda, good idea?

JAMES REDA, compensation consultant: Well, I think it's the worst of four evils. I certainly think it's a better idea than having a pay cap, than having a formula, than having a 90 percent tax rate for those that make over a certain amount.

So even though I don't think it's a great idea, I think it's a better idea than what has come out of the administration prior.

JUDY WOODRUFF: What is your disagreement with it?

JAMES REDA: Well, certainly, if there's a problem with how a company pays its executives, they should do two things: One is they should get rid of management or they should get rid of the board.

This idea of the government interfering with operations of these publicly traded companies, I think, is a bad precedent. Now, certainly, if they just limited it to those TARP companies, maybe it's OK. But I'm just a little suspicious that some people might think this is an incubator for a wider application.

Rules limited to some companies

Thea Lee
AFL-CIO
The government is paying the bill. I think the government has not only a right, but an obligation to step in and to set some limits here, so I think it's entirely appropriate in this instance.

JUDY WOODRUFF: Well, it's my understanding they are limiting it to the companies that received large infusions of government money, the TARP money. Thea Lee, is that your understanding?

THEA LEE: Yes, absolutely. And, you know, the government is paying the bill. I think the government has not only a right, but an obligation to step in and to set some limits here, so I think it's entirely appropriate in this instance.

JUDY WOODRUFF: And, James Reda, I read top officials at the Financial Service Roundtable said there is a recognition that if you accept government money you should be subject to restrictions.

JAMES REDA: Well, that's true to some degree, but I think the restrictions should be along the line of getting the right management and getting the right board to oversee management. I'm not really one to have guidelines or to have a special master oversee these companies.

I think these companies can be extremely successful in the very near future, but right now they're hampered in a lot of ways and they're losing talent to foreign companies, to private companies, and I don't think that's in the best interest of shareholders.

THEA LEE: You know, when we talk about the talent, I just have to say, these are the companies that took their own financial institutions into the gutter and they're taking the whole U.S. economy and the global economy with them. I have to say that the whole idea of paying for talent doesn't really seem to have worked in this instance.

Recommendations to Congress

James Reda
Compensation consultant
One of the congressmen just introduced a bill saying that, unless 60 percent of shareholders agreed, CEOs cannot make more than 100 times the lowest paid worker or something to that effect. Those things we don't need.

JUDY WOODRUFF: Let me ask you, James Reda, about the other step that the administration took today, and that was these two recommendations to the Congress. Number one, that essentially they passed legislation saying to companies: You must let your shareholders have a say, a nonbinding say, but a say in setting executive compensation.

JAMES REDA: Well, I think, again, it's moving in a direction that I don't like, but I think, in general, the concept is that, if companies disclose how much they're paying executives and they have an independent board to set the pay for these executives, I think that's the right answer.

Having shareholders having the say on pay is, again, I think the worst of evils, including having more oversight, the direct oversight by the government, or coming up with a new tax rule that just doesn't make any sense and will prevent companies from doing their business.

JUDY WOODRUFF: But let me see if I understand you. You're saying it's better than something that would have been more onerous?

JAMES REDA: Correct. It's better than having a cap -- for example, one of the congressmen just introduced a bill saying that, unless 60 percent of shareholders agreed, CEOs cannot make more than 100 times the lowest paid worker or something to that effect. Those things we don't need.

So say-on-pay, if it -- if it makes companies -- if it makes this go away and allows companies to go back and do their business, I think it's a good thing.

JUDY WOODRUFF: Thea Lee, what about this part of the proposal, the so-called say-on-pay?

THEA LEE: Well, we think say-on-pay is a great idea. It's something we've been advocating for, for a long time. I mean, it's almost a minimum thing that you could ask that shareholders, who are the owners of the companies, haven't had a say in the setting of pay in the past, and that the CEOs have set their own pay, and they've set the pays of their best friends, and these very insular, self-referential committees where they set each other's pay, they do each other's favors, and the overall result has been terrible.

It's been terrible for their companies, but it's been terrible for the economy as a whole, because we've allowed the pay packages to create adverse incentives, where there's very risky behavior, terrible toxic assets that these folks have done, because they have individual financial incentives to engage in this bad behavior.

And so that's really what's important. I think say-on-pay is an essential first step. It creates more transparency and more voice for the shareholders. It shouldn't be the last step, though.

Independent compensation committees

Thea Lee
AFL-CIO
The government traditionally does have the right to set minimum standards for shareholders and what shareholders can and can't do.

JUDY WOODRUFF: And, Thea Lee, just the other piece of what the administration's recommending to Congress, and that is making sure that compensation committees are independent from corporate management.

THEA LEE: Yes, we think that's an excellent move and definitely in the right direction. And in some ways, it's outrageous that this hasn't already happened before this time.

And, you know, the government traditionally does have the right to set minimum standards for shareholders and what shareholders can and can't do. This is part of -- the government allows corporations to establish and then, in return, the government sets some standards for their behavior. And I think this is a good example of that.

JUDY WOODRUFF: And, quickly, before I come back to James Reda, so, Thea Lee, are you saying you think it's tough enough?

THEA LEE: I think it's a good start.

JUDY WOODRUFF: OK. James Reda, what about -- just asking you overall and specifically this last piece about making sure the compensation committees are independent?

JAMES REDA: I think that's a fantastic idea. And along the lines of where I'd like to see this go, in that boards would be stronger, more independent, and more willing and able to make those tough oversight decisions of management.

Now, of course, you know, boards oversee companies and they're more strategic, so we certainly don't want boards micromanaging companies. But I think the big decisions -- and setting pay is one of those big decisions -- anything that helps with that.

They also -- one of the provisions of this bill is there's a provision for independent compensation consultants, that the compensation committees have independent compensation consulting advice and other advisers, and I think that's also a step in the right direction.

JUDY WOODRUFF: All right. A lot to look over, to chew over today. Thank you both, James Reda and Thea Lee. Thanks.