Under the plan by executive pay czar Kenneth Feinberg, the 25 top earners at each of the seven firms — AIG, Bank of America, Citigroup, Chrysler, General Motors and the financing arms of the two automakers, all of which received billions of dollars in aid from the government — will see their cash salaries limited to $500,000, and their overall compensation cut by more than 50 percent.
“I am extremely sensitive to the public outrage,” Feinberg told reporters during a briefing in Washington.
In addition to the top 25 earners, the pay cuts will apply to compensation earned by 150 other employees under Feinberg’s supervision beginning in November; the rules will stay in place through the end of the year, and then be revisited in 2010.
Feinberg has also ordered a series of corporate governance changes at affected firms. Among the changes will be splitting the chairman and CEO positions, requiring boards of directors to form “risk” committees, and giving shareholders a nonbinding vote on the pay of top executives.
Compensation, beyond being lowered, will also take on structural changes. Top earners will see their cash compensation cut by 90 percent compared to 2008, with the remainder being replaced by stock that cannot be sold for a number of years. The shift is designed to bring compensation in line with the long-term health of the companies and to remove the incentives for executives to take short-term, risky bets in order to increase pay.
Bonus awards will take the form of long-term stock. The awards would be performance-based and could be redeemed after three years, or sooner if the company repays its government aid.
According to the Wall Street Journal, some of the toughest pay restrictions will come at the financial-products unit of AIG, which has been blamed for the firm’s near-collapse. No employee within that unit will receive compensation of more than $200,000.
Separately on Thursday, the Federal Reserve announced a plan to eliminate pay packages that encourage the kinds of risks that contributed to the housing bubble. As part of the plan, the central bank will review compensation policies at 28 large banks to determine whether their pay cultures encourage excessive risk.
“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Fed Chairman Ben Bernanke said in a statement.
The moves by the Treasury Department and the Fed are bound to spur debate about the lengths to which the government can go to regulate pay at private firms. The political winds have blown steadily against large pay packages for executives at firms that received billions in taxpayer-funded aid. But because the pay restriction plan won’t affect many top Wall Street firms, the days of eight-figure pay packages are far from over.
“The government is acting like the owner they are, and they’re a pretty ticked-off owner,” Steven Hall, managing director of New York-based compensation consultant Steven Hall & Partners LLC, told Bloomberg. “The fear is, will this make people throw up their hands and say, ‘I have to leave?'”
Feinberg, who was named the Treasury Department’s special master on compensation in June, was the former administrator of the 9/11 Victim Compensation Fund. He was given authority to set compensation for the top five executives at each the seven most bailed-out firms, as well as each firm’s 20 top earners.
He is scheduled to testify on the plan before the House Oversight and Government Reform Committee on Wednesday.