Saturday, December 12, 2009

The Federal Pay Czar Moves to Cap Executive Salaries At TARP Firms

On Friday, Kenneth Feinberg, the White House’s “pay czar” unveiled new pay restrictions that are aimed to limit the pay for top employees among the largest TARP bailout recipients. Thus far, this Feinberg’s actions on Friday represent the largest effort to cap or limit the pay of top employees. Feinberg’s ruling will impact 75 out of the top 100 highest-paid employees at Citigroup, AIG, General Motors, and GMAC.

Feinberg’s ruling prevents employees at the largest TARP recipient companies from receiving base salaries of more than $500,000. Of this $500,000 base salary cap, at least ½ of that amount must come in the form company stock, and the remaining ½ in cash. In a press conference yesterday, Feinberg noted: “We want to minimize these runaway perks and other compensation practices.” Feinberg’s ruling takes effect on Friday and is not retroactive.

This is the second time since October that Feinberg has weighed in on executive compensation. In October, Feinberg cut the compensation packages for the top 25 executive at the seven companies that received federal bailout money more than once. In October, Feinberg’s shrunk salaries by 90% and transferred bonus payments into a performance-based pool of long-term stock options. Feinberg’s October pay pronouncements affected 136 executives. This time around, 450 executives will likely be affected by Feinberg’s plan.

Companies opposed to Feinberg’s plan have presented two (2) main arguments in opposition. First, companies affected by Feinberg’s plan have argued that government imposed pay curbs have prompted the best and brightest to flee their ranks. Second, they have argued that caps would hinder the overall performance of their companies’, thereby making it harder to pay back their TARP funds. Feinberg indicated that he carefully evaluated these concerns. Indeed, Feinberg has granted an exemption for nearly a dozen individuals “deemed to be very essential” to be paid more than $500,000. Most of these “essentials” will earn between $500,000 and $950,000 annually. One individual will make over $1 million. Feinberg indicated that his office would have the final say on the size of a company’s bonus pool and how it is allocated.

TARP bailout recipients have been scratching their heads to figure out how to quickly repay their TARP funds. This week Bank of America rushed to payback $45 billion in TARP funds to escape Feinberg’s salary death-grip. This week we were informed that Citigroup is exploring a number of options to raise capital to pay-back billions of dollars in TARP funds.

Are we seeing a larger movement to limit or cap executive compensation? Perhaps. However, it is still too early to tell. On Thursday, Goldman Sachs announced that the 30 executives who comprise the company’s management committee will not receive cash bonuses this year. Also, Goldman Sachs announced that shareholders would get an advisory vote on pay packages for executives. This is an indication of some positive movement. Undoubtedly, more traction and movement is needed to tackle the difficult problem of executive compensation. Certainly, the issue is on the radar screen for many.


  1. Joe:

    Another great post.

    Here is my theory:

    They are trying to cause compensation to fade in the public consciousness. All of these band aids give the impression that the government is cracking down on compensation. But the reality is its all symbolic. No real break on CEO power is likely to emerge .

  2. The government didn't just bailout GM, it bailed out the UAW as well. Where are the salary caps for UAW executives? Why haven't UAW members had to take wage cuts and make other concessions?

    What about the executives at Fannie and Freddie? Why is the taxpayer paying the legal bills of their disgraced former executives ? And why are they entitled to receive huge compensation packages and bonuses, while TARP recipients are targeted?

    Initially, these caps applied to companies that were forced to take TARP money, including JP Morgan and Wells Fargo. Was that just?

    These are all very interesting precedents. Will future administrations be able to force government funds on companies and then dictate terms of employment? Will the government now extend wage restrictions to all entities receiving government money? How about Hollywood executives whose studios routinely receive government subsidies? Professional athletes who play in public stadiums? Academics whose institutions are dependent on government largesse? And will the person making these decisions ever be required to be confirmed by the Congress?

    I think those cheering these efforts should take a little more time thinking about how they might fall victim to them.

  3. If one concludes that the government has no right to restrict private sector compensation, why not make only one new law. The shareholders vote on compensation via proxy.