The U.S. pay czar Thursday slashed cash compensation for the top earners at seven companies that received massive taxpayer bailouts, while allowing for some increases to retain key talent.
Kenneth Feinberg, charged with reworking pay contracts for the 25 highest-paid employees at the seven banks and automakers, said their cash compensation rate for the remainder of 2009 would drop by more than 90 percent compared to 2008. Overall compensation rates would be cut in half, on average.
“I am extremely sensitive to the public outrage about this,” Feinberg told reporters.
The companies affected are American International Group Inc., Bank of America Corp., Citigroup Inc, General Motors Co., Chrysler, GMAC and Chrysler Financial.
(Feinberg has sent letters to each firm with his compensation determinations. In his letter to AIG, Feinberg informs AIG CEO Robert Benmosche that 2009 base salaries for AIG’s highest paid executives should not exceed $500,000, except for good cause. This means that overall cash compensation must be reduced 91 percent from 2008 levels. The majority of compensation is to be paid in stock rather than cash. Also, total compensation must be comparable to compensation for senior executives at similar firms. In AIG’s case, total compensation for these senior executives will decrease 58 percent from 2008 levels.)
Feinberg’s powers only extend to those companies, but he said Wall Street should take notes and apply the standards more broadly.
Complementing Feinberg’s action, the Federal Reserve issued guidelines to rein in compensation at the banks it regulates to discourage the type of excessive risk-taking officials say contributed to the credit crisis that pushed the U.S. financial system to the brink of collapse last year. The Fed oversees more than 5,000 bank holding companies and over 800 smaller state-chartered banks.
Feinberg hinted that the bailed-out firms did not come to him humbly and said that without exception, all of the pay plans that they submitted were inconsistent with the public interest.
His long-awaited pay rulings will apply largely to November and December. However, because those months determine the year-end bonuses that make up a large chunk of pay in the financial sector, it will have a profound effect on the earnings of the five top executives and 20 other highest-paid employees at each of the firms.
Feinberg largely pushed base salary payments into the form of stock that cannot be touched for years and bonuses granted in the form of long-term stock.
“What I learned through this whole experience is there is entirely too much reliance on pay in cash,” Feinberg said.
President Barack Obama welcomed Feinberg’s actions. “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, but more work needs to be done.”
The Obama administration is eager to show that it understands public outrage over generous bonuses paid to employees at firms that received billions of dollars in public aid. With the U.S. unemployment rate nearing 10 percent, executive compensation has been drawing widespread fire.
Anger boiled over in March when AIG handed out fat bonuses just months after accepting tens of billions of dollars in government aid. AIG’s Chief Executive Robert Benmosche moved to quell concern among the insurer’s employees on the potential impact of Feinberg’s actions.
“It is important that all of you know that the Special Master’s jurisdiction is quite limited, and we expect Feinberg’s … decisions on compensation to cover only the top 25 employees at AIG,” Benmosche said in an internal memo obtained by Reuters.
Recent news that Goldman Sachs Group Inc. had set aside $16.8 billion for compensation, so soon after repaying $10 billion in taxpayer money, had fueled concerns that Wall Street was already returning to the lavish pay practices that were commonplace before the financial crisis struck.
The companies themselves argue that without generous pay and bonuses, they cannot attract and retain the best workers and will lose out to competitors in less regulated markets.
ALIGN PAY WITH PERFORMANCE
The Fed said pay practices should reward performance and firms must take care not to pay out large, short-term bonuses on longer-term investments that could later prove disastrous for the company and the economy.
It said it would review compensation practices at the largest financial firms but stopped short of setting pay caps or outlawing any specific practices.
“Banking organizations too often rewarded employees for increasing the firm’s revenue or short-term profit without adequate recognition of the risks the employees’ activities posed to the firm,” the Fed said in its guidelines.
The central bank is looking for input on more specific rules about how much pay should be in the form of deferred compensation and how much in cash.
(Writing by Emily Kaiser and Tim Ahmann; Editing by Kenneth Barry)
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