TOPICS > Economy

Feinberg Hopes More Companies Adopt Executive Pay Rules

October 22, 2009 at 12:00 AM EDT
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The Federal Reserve curbed pay packages for executives of companies that received bailout money in an effort to discourage risky business practices. Jeffrey Brown speaks with executive pay czar Kenneth Feinberg.
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JUDY WOODRUFF: Federal agencies moved on two fronts today to curb executive pay. It was the latest fallout from last year’s financial meltdown. And it came in separate announcements by the Treasury and the Federal Reserve.

Jeffrey Brown has our lead story report.

JEFFREY BROWN: Under a Treasury Department order this afternoon, seven major firms that have not repaid their federal rescue funds will be the first to feel the pay pinch.

They include Bank of America and Citigroup, as well as insurance giant AIG, plus General Motors and Chrysler, and their respective financing arms, GMAC and Chrysler Financial.

Kenneth Feinberg, Treasury’s Special Master on Compensation, laid out the limitations. A total of 175 corporate executives will be affected, including the 25 highest-paid employees at each firm. Overall compensation, including bonuses and retirement, will be cut 50 percent, on average. Cash salaries will drop an average of 90 percent, with most falling below $500,000.

At the White House, President Obama praised the Feinberg plan.

U.S. PRESIDENT BARACK OBAMA: He was faced with the difficult task of striking the proper balance between standing up for taxpayers and returning a measure of stability to our financial system.

Under these competing interests, I believe he’s 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.

JEFFREY BROWN: But there was criticism. Daniel Mitchell at the conservative Cato Institute said the Treasury mandate goes too far.

DANIEL MITCHELL: If you wind up having second-rate people in your companies because you can’t pay them enough, that’s presumably going to hurt the rest of us, because our economy won’t be as dynamic.

JEFFREY BROWN: And a congressional oversight panel focused on a provision to let executives receive stock, in lieu of cash, so long as they hold it for four years.

Curbing excessive risk-taking

Herbert Allison
U.S. Treasury Department
Some of the pay will be conditioned on returning TARP money to the taxpayers. They're designed to discourage excessive risk-taking.

DAMON SILVERS, director of policy & special counsel, AFL-CIO: In pushing pay onto -- on -- into equity form, where -- where the stock price is low, it's not clear these folks really have that much downside exposure. And, so, as a result, I'm concerned that we're incentivizing a certain amount of risk-taking, with the public's money as a backstop.

HERBERT ALLISON, assistant treasury secretary for financial stability: Most of the pay will be long-term in nature. Some of the pay will be conditioned on returning TARP money to the taxpayers. They're designed to discourage excessive risk-taking.

JEFFREY BROWN: The Federal Reserve also stepped into the pay issue today with a sweeping proposal to police pay at nearly 6,000 banks. The Fed would not set compensation levels, but it could veto bank plans if they're deemed likely to foster risky actions by executives.

The Fed plan could be adopted in final form next year. In the meantime, companies affected under the Feinberg plan, including GM and Citigroup, said they are working to comply. But Bank of America warned it will lose valuable employees to companies not subject to the pay curbs.

And President Obama said there is more to be done. He wants Congress to allow shareholders a say in setting future pay packages.

And joining me now is Ken Feinberg.

Welcome to you.

KENNETH FEINBERG, special master for executive compensation: Thank you.

JEFFREY BROWN: What's the basic principle here? Is it -- is it meant to be punitive, to say clearly that excessive pay helped cause the crisis, and someone should be held accountable?

KENNETH FEINBERG: Absolutely not.

This is not a punitive or a vindictive program. Under the statute, the primary obligation of this plan is to get these companies to repay to the taxpayer the money that was loaned.

JEFFREY BROWN: So, how do -- how do you get it right? In your head, what do you have to -- but you heard the president talk about a balance here. What -- explain the balance.

KENNETH FEINBERG: The balance is a third, a third, a third.

First, let's lower cash guarantees. The cash component of salary should be reduced substantially. Instead, let's tie individual compensation to salarized stock, but not stock that can be sold immediately. You have to hold the stock as long as four years.

And the value of that stock for you, as an official, depends on the improvement of the financial condition of the company. And, finally, we will give even more stock over -- beyond a three-year period. But, in order to redeem that stock, repay the taxpayer. And only then can that stock be cashed in.

Seven companies under review

Kenneth Feinberg
Treasury, Special Master on Compensation
These seven companies are largely owned by the taxpayer. And the reason that the focus is on these seven is so that the taxpayer ultimately can get their money back.

JEFFREY BROWN: And those kinds of changes you -- you feel are necessary, because it was those practices that had -- either had a bad effect or might in the future towards excessive risk?

KENNETH FEINBERG: Yes, but mainly those -- those elements of this plan are tied to the statute that Congress enacted with TARP that spelled out much of what led to this approach that we're taking, the special master.

JEFFREY BROWN: All right. So, there is a statute. But the -- the larger context here, the principal concern, I guess, would be crossing an important barrier here, where the federal government is setting compensation in the private sector.

KENNETH FEINBERG: That's correct, but only for these seven companies.

And why these seven companies? Congress spoke to that. These seven companies are largely owned by the taxpayer. And the reason that the focus is on these seven is so that the taxpayer ultimately can get their money back for those loans that were sent to these -- keep these seven companies in business.

JEFFREY BROWN: Well, I did want to ask you, why not go further? I understand, OK, those -- these seven still owe money. But is not the principle the same for a Goldman Sachs or someone else that took the money, did OK, and fairly recently have told us that they're going to be -- have very large compensation packages?

KENNETH FEINBERG: I would hope that corporate America, privately, might endorse and adopt some of these very principles that we have announced today.

But I do not think it is a good idea for the federal government to expand its role into all of these other corporate entities. I think that would be a bad idea.

JEFFREY BROWN: Because?

KENNETH FEINBERG: Because it -- it is -- the -- the private marketplace should be able to have the flexibility to adopt these programs on their own.

The president has said, the secretary has said, we do not want to micromanage these companies, beyond these seven. And I think Congress, wisely, limited my jurisdiction to these seven companies where the taxpayer is the major creditor.

Executive pay a 'delicate balance'

Kenneth Feinberg
Treasury, Special Master on Compensation
It's a delicate balance. On the one hand, you want these companies to thrive, so that the taxpayer can be repaid. On the other hand, you have got to take into account the fact that excessive compensation can lead to this risk-taking.

JEFFREY BROWN: Now, the -- you hear the criticism. We heard in our piece. And -- and Bank of America issued a statement. They said that competitors are already recruiting employees.

Their statement says -- quote -- "People want to work here, but they want to be paid fairly."

KENNETH FEINBERG: I think...

JEFFREY BROWN: Your response?

KENNETH FEINBERG: I think Bank of America -- we worked with the bank. I think that -- along with all of these seven banks -- these companies. There was a great deal of cooperation.

It's a delicate balance. On the one hand, you want these companies to thrive, so that the taxpayer can be repaid. On the other hand, you have got to take into account the fact that excessive compensation can lead to this risk-taking that has led to many of the problems now confronting the country.

So, I admit it is a very delicate balance, and I hope that we have been able to balance this correctly.

JEFFREY BROWN: Well, when they say, Bank of America in this case, says that competitors are already recruiting, do you believe them?

KENNETH FEINBERG: I think that the plan that I have adopted today will allow Bank of America to go forward and thrive at a level of compensation that is more commensurate with what is necessary, in light of all of the other factors in the statute.

JEFFREY BROWN: Now, the other argument from the other side would be that you could have been tougher. These changes begin in November, right, November compensation? You could have told companies perhaps that, if they don't renegotiate contracts that they already have, don't expect any more help. Don't expect any help from the federal government.

KENNETH FEINBERG: First of all, with almost -- almost without exception, we did renegotiate with these seven companies all old existing contracts, so that they folded all of those contracts prospectively into the stock salary moving forward. That's first.

Secondly, I think that any company that feels that it's been disadvantaged, any of these seven, I welcome them to come back. We have been cooperating over the last five months. We're getting ready to look at 2010 compensation in just a few months. And I hope that we will continue to have a dialogue on this.

JEFFREY BROWN: Well, in fact, explain this, because you're -- you're continuing -- this just deals with the first 25 people at a company.

KENNETH FEINBERG: That's correct.

JEFFREY BROWN: But you're going to look beyond that.

Government in the private sector

Kenneth Feinberg
Treasury, Special Master on Compensation
I have learned in this exercise the last few months, there is a gap between Wall Street and Main Street, in terms of the perception concerning compensation.

KENNETH FEINBERG: Well, under the law, now that we have looked at the first 25, our next assignment, under the federal statute, is to look at employees or officials 26 to 100, in terms of compensation, and not to look at their individual compensation, but to develop a compensation structure that hopefully will guide these companies and other companies, privately, going forward in dealing with this complex topic.

JEFFREY BROWN: What about the Fed action today, separate, but sweeping, to many more companies, to review pay packages at largest banks, to -- to look at them to see if they're encouraging risky behavior, similar goal as what you're talking about, but a broader sweep?

KENNETH FEINBERG: All to -- all to be welcomed.

The Federal -- the Federal Reserve principles are general principles that will be applied by the Fed well beyond the seven companies that I'm concerned with. But it's all part of really the same plan, which is, through general principles or the specific determinations that I have made, to rein in and -- and develop a better approach to performance-based compensation.

And I think we're on the same page in that regard.

JEFFREY BROWN: But the balance is still there for the Fed, for you going forward. There was public outrage on one hand, and then there are business -- there's the private sector that says, the market works. This is how we pay people. This is how we traditionally do it here. Don't -- you know, how does the government get it right?

KENNETH FEINBERG: I think it's a very, very difficult balance.

One thing I have learned in this exercise the last few months, there is a gap between Wall Street and Main Street, in terms of the perception concerning compensation.

And I have tried my best, independently, without any political interference at all from anybody, with the -- with the great support of the secretary of the Treasury, to try and balance these competing priorities or views expressed by Wall Street and Main Street. And, hopefully, I have got it right.

But it is complicated, and it is controversial.

JEFFREY BROWN: All right.

And, finally, so you're coming back. You're going to look at 2010 starting January, right? So, is it possible you come back and you set new rules for the 2010 compensation?

KENNETH FEINBERG: It's not only possible; it's entirely likely. It may be different people that aren't in the top 25 or have now become in the top 25.

There may be grandfathered old contracts that are triggered into 2010. I think we have to, again, go through this same process, but much quicker, hopefully in 30, 60 days, and set compensation in 2010 as well.

JEFFREY BROWN: All right. Ken Feinberg, thank you very much.

KENNETH FEINBERG: Thank you very much.