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Administration Proposes New Regulations of Executive Pay

Treasury Secretary Timothy Geithner said the administration is not interested in capping pay or “setting forth precise prescriptions for how companies should set compensation,” according to the Washington Post.

Instead, Geithner said, a “say on pay” proposal would allow shareholders to vote on executive pay packages. Although the results would not be binding, Geithner said the change would pressure boards of directors to rein in excessive compensation.

Listen to Geithner, SEC Chief Mary Shapiro and Federal Reserve Governor Dan Tarullo discuss the proposals:

Another proposal would give the SEC authority to make sure that corporate compensation committees remain independent from boards of directors.

In March, insurance giant AIG caused a furor when the failing company, which had received $180 billion in government aid, handed out $165 million in bonuses to its executives. And Treasury Secretary Timothy Geithner and other officials have said that an executive pay structure that rewarded short-term profit over long-term gains was partly to blame for the current financial crisis.

“Although many things caused this crisis, what happened to compensation and the incentives that created for risk-taking did contribute in some institutions to the kind of vulnerability we saw in this financial crisis,” Geithner told the Senate Appropriations Committee Tuesday, according to ABC News.

Two separate issues are under discussion now — regulating pay at companies that received federal bailout money, and broader guidelines for regulating pay in the industry as a whole.

Companies that received the bailout money will be affected by a provision added to the $787 billion stimulus bill by Sen. Christopher Dodd, D-Conn., that would restrict bonuses at companies that received TARP funding to no more than one-third of an executive’s annual salary.

The administration is also expected to announced that Washington lawyer Kenneth Feinberg will take the role of “pay czar” to review and enforce those regulations. On Tuesday, 10 large banks got permission to return their TARP funds in time to avoid the regulations, but many companies, including AIG, Bank of America, and Citigroup would still be affected.

Geithner met privately Wednesday with Securities and Exchange Commission chairwoman Mary Schapiro, Federal Reserve Governor Dan Tarullo and executive pay experts to discuss the broader industry-wide reforms, according to the Associated Press. Geithner wants to give the Fed and the SEC more power to guide pay policies. He’s described guidelines that would base compensation on long-term performance.

The proposals, meanwhile, have met resistance from the financial sector, which has argued that pay restrictions will discourage innovation and drive talent to foreign firms, the AP reported.

“This is opening Pandora’s box,” Tom Quaadman of the U.S. Chamber of Congress told the AP.

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