Thursday, April 22, 2010

Pay Czar Strikes Back at Excessive Executive Compensation

In June 2009, President Obama appointed Kenneth Feinberg, the Pay Czar, as he is often referred to in the media, after public anger exploded over high executive compensation at companies that received Troubled Asset Relief Program (TARP) bailout funds. Feinberg is well versed in areas of human resources valuation, and consensus building without the need for litigation. Feinberg previously oversaw the distribution of funds for victims of the attacks of Sept. 11, 2001. In August, 2009, revision to the TARP legislation attached executive compensation restrictions to the pay for the top 25 earners of any company that received TARP funds, and compensation totaled more than $500,000 from October 2008 through February 2009, including 2008 end-of-the-year bonus payments. The revisions to the TARP legislation also gave Feinberg “wide authority to attempt to recoup money” paid to employees at companies that received TARP funds.

A few weeks ago in March, Feinberg completed his review of executive compensation at 419 companies that had received bailout funds. Feinberg in his discretion determined whether any payments were contrary to public interest and may request that individual executives return the excess money received. Unfortunately the TARP legislation, despite its “wide authority to attempt to recoup money“ does not specifically provide Feinberg with any enforcement authority, regarding the recoupment of excess executive compensation. As such, Feinberg cannot force executives to return the money. However, this lack of enforcement authority does not seem to concern Feinberg. He believes that the he can be very persuasive. An interview with Feinberg discussing his authority to recoup funds from executives is available here. Executives at several companies fall into this category including JP Morgan Chase, Goldman Sachs, AIG, Citigroup, General Motors, and GMAC. Bank of America repaid $45 billion to the U.S. Treasury, two days before Feinberg’s report was released, and effectively removed itself from Feinberg’s scrutiny.

Feinberg's executive compensation restrictions and recoupment power is regarded by some as a bold expansion of his “review of pay powers,” and may send a signal to Wall Street that it cannot return to big bonus payments without intense public and governmental scrutiny, and ire. Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University, believes that Feinberg's look-back plans are necessary. Hurley stated that “[I]f the notion was to see who had their hand in the cookie jar when the crisis was unfolding, then that should be revealed."

Recently, the New York State Comptroller released a report in February showing that bonuses on Wall Street rose 17 percent in 2009 to $20.3 billion. This figure is a little incredulous to me given that the vast majority of Americans are struggling to save their jobs, homes, retirements, and feed their families. Wall Street's disconnect with human suffering or basic moral compass as to what is appropriate, reminds me of the Army-McCarthy Hearing which was the first federal hearing broadcasted live to the American people in February 1950. Senator Joseph R. McCarthy was chairman of the Senate Committee on Government Operations and its Subcommittee on Investigations. McCarthy demanded preferential treatment for his aide who had been drafted, and was scheduled to be sent abroad. When the U.S. Army refused to extend any preferential treatment on Senator McCarthy’s behalf by deciding not to intercede in the draft process, Senator McCarthy immediately commenced an investigation of the U.S. Army. McCarthy was summoned to appear before Congress to answer questions regarding his motive for commencing an investigation of the U.S. Army. The verbal inter-change between McCarthy and Special Counsel for the U.S. Army, Joseph N. Welch, became very heated. At one point Welch, exasperated with McCarthy’s sarcasm and blatant lack of respect for the U.S. Army, Congress, and anyone who dared to question his actions, lost his usual reserved demeanor, stood up and yelled at McCarthy-- “You have done enough. Have you no sense of decency sir, at long last? Have you left no sense of decency?” Americans were outraged by McCarthy’s lack of respect, decency, and his sense of entitlement to preferential treatment. Americans wasted no time in expressing their outrage to their elected officials. Within a few months of the hearing, the Senate voted to condemn McCarthy.

Public exposure has proven to be a powerful tool, as evidenced by the condemnation of Senator McCarthy, and the slow but largely successful repayment of bonuses that were previously paid to AIG employees. However, some experts are doubtful, “Wall Street might be immune to shame,” said Russell Roberts, an economics professor at George Mason University, and research fellow at Stanford University's Hoover Institution. Roberts stated that, “[I]f the goal is to shame executives, there is not much shame on Wall Street, and I doubt it would have much effect if that is [Feinberg’s] only lever." I would not underestimate Feinberg. He has proven to be very very persuasive, and Americans are outraged. It may prove to be a combustible combination.

Lydie Nadia Cabrera Pierre-Louis


  1. I believe when these execs comply with the law they should be entitled to any compensation they can negotiate for. However the laws should be tailored to hold them financially responsible in certain conditions or subvert much of their earnings in extremely bad economic climates.

  2. Wall Street is not going to give back a dime. If they do it will not be voluntarily. They are in this industry to make money. If the board approved their compensation why should they give it back? You can try shaming Wall Street all you want to. At the end of the day they have money and we don't. Feinberg should get some statutory authority if he expects to get anything out of these guys. May be that is why he was not given statutory authority to enforce his recoupment power in the first place. No power, no dinero.

  3. Wall Street is greedy. It is the great American scam.

  4. Like it or not, generally Executive Compensation is governed and protected by the Business Judgment Rule. That is to say, the decision of how much to pay a company's executives is a business decision made by that company's Board of Directors (Board). Generally, the courts will not second guess what a Board is paying its executives because the Board (and not the court) is in the position to make that decision. Even with that said, there is always an execption to the general rule and an exception should be made (1) in times of emergency, and when (2) such company receives funds from the U.S. Government-taxpayers. When these to conditions are met, since the company is now faltering and has come to the taxpayers for help,the Business Judgment Rule should be suspended. That means now the court, acting on behalf of the taxpayers, will look directly into the compensation of company executives and can mandate that such compensation be "reasonable" and based on such criteria like the company's performance under said executives, what other companies similiarily situated are paying their executives,etc. This is perfectly reasonable and logical because the court will be acting on behalf of all taxpaxers, who have indirectly and involuntarily contributed enormous capital to these companies. As such, the interest of the taxpayers, now holding special share holder status, can be protected. Enormous executive compensation and bonuses, especially in light of a company's bad performance and a "bailout" by the taxpayers against the majority taxpayer's consent, is wasteful and unjustified. As such, such a decision should not be protected by the Business Judgment Rule.

    Alexander M. Vang
    J.D. Candidate '11

  5. STU Steve Newbold

    I really enjoyed this article, because it correctly illustrates the real problem.

    The Media intentionally misframes the issue by debating whether or not Obama is a socialist. This is by design, since the Cable Media, which is controlled by the elites, enjoys it when all of us "Sheeple" are constantly at odds with each other.

    Therefore they frame each issue to pit rich against poor or democrat against republican, conservative against liberal, or your "for the troops or against the troops."

    The point is, Obama is not a socialist, and when the Media calls him, it's to distract us "sheeple" from engaging in a real debate.

    The real debate is whether or not Obama is a "corporatist."

    This is the notion that the elite groups can mold society from the top down.

    For example in America right now what's going on is that the Federal Government is investing billions of dollars in businesses. In return they get influence over corporate policy, lending, executive bonuses, and will make decisions like how a product will effect global warming.

    So politicians get to coerce corproations to make decisions, not based on consumer demands, but on special interest groups. For example, if a scientist, as part of a corporation found that global warming didn't exist, then he could get fired.

    If you're a Republican reading this, don't get cocky.

    Bush II was undeniably a corporatist as well, and assuming Mitt Romney, Newt Ginrich, or God forbid even Sarah Palin got on the Republican Ticket in 2012, they will further the corporatist agenda.

  6. STU Steve Newbold Part 2. . .

    Yes, I am here to tell you, the system is broke, and under the current system it makes absolutely no difference who you vote for in the 2 main parties.

    Bush II gave $700 billion bailouts, and of course created all sorts of policies that allowed corporations to take huge risks, and in turn gained the same influence over the corporations that Obama is enjoying today.

    The Corporate Controlled Media's job is to control us "Sheeple."

    Therefore they tell us the Right was responsible for "deregulation" and the Left is responsible for "socialism."

    The media knows it simply can use these buzz words and the masses begin to bicker against each other.

    Neither deregulation nor socialism has affected or will effect the market. Both parties are responsible for corporatism.

    When more people understand this, it will make more sense why Rupert Murdoch, the head of the conservative Fox News and Washington Post, donates money to Hillary Clinton.

    Under the left/right paradigm this makes no sense.

    But when you understand that the left/right paradigm is fake, and designed to distract you from real issues, it makes sense why Rupert Murdoch would donate to a democrat. Because on the issues that he really cares about, they agree on.

    And that's true for all the elites who pose as democrats and republicans.

    And to my professor, who says that public exposure is a powerful tool, I agree. It is a powerful tool.

    But when speaking out in this country, half the battle is fighting the disinformation machine by the Corporate-Controlled-Media.

    Here's what happens to people who speak out:

    The recent Pentagon Shooter was accused of being part of the 9/11 Truth Movement. This was later proved to be untrue.

    The Tea Party movement, from what I understand, are the ones who have spoken out the most against Taxes for the bailouts. Mission one is to label them "right", thus turning 1/2 the country against them (even though from my understanding, the movement supports all the civil liberties and pulling out of Iraq and Afghanistan, ideal that Democrats traditioanlly have held for and Republicans against).

    But never mind all that, they are "right wing." Everything has to be "right wing" or "left wing" and the Media has decided to pick "right wing" and only focus on the taxation issue and not hte civil liberties. This allows for 1/2 the country to immediately tune out whatever they say.

    They have also been called "violent extremist" and "the fringe right" and a "hate group."

    Republicans have tried to "hijack" the movement, and call it a conservative movement (although the group is made up of liberals as well).

    When the guy crashed his plane into the IRS building, it was immediatley reproted he was part of the Tea Party, then retracted.

    Those who speak out against the Federal Reserve are called "looney" by the mainstream media and casted aside as "conspiracy theorists."

    Those who speak out against the unjust wars, such as Cindy Sheenan, have their names dragged through the mud and I believe "liberal" was the bad word back then.

    Those who still believe in civil liberties are called "soft on terror" or even worse "for the terrorists."

    I remember when anyone who used to question the official 9/11 story used to be on the "fringe left" but now if you question it you are on the "fringe right."

    In closing, if you do speak out. Please don't start the "deregulation" vs. "socialism" debate.

  7. I watched the Roto Rooter episode of Undercover Boss TV show the other day. Watching the CEO get his hands dirty and “find” himself through direct contact with his hard-working, good-hearted employees (yes, the show is a little overearnest, but still worthwhile!) left me imagining an unvarnished episode tracking the head of CitiGroup. It might have to be a satire, since it’s easier to laugh than cry.

    If the USG has no effective legal remedy to retroactively make the CEOs disgorge their tax-payer funded bonuses through the regular court system (because they forgot to build that into the TARP legislation), the designation of an ARBITRATOR as the “special master” to accomplish the task points to an equitable means to “do justice.” The government spends an awful lot of money keeping the free market free… so now, after misbehavior, comes the discipline – clearly, we should have had a few more ground rules (and we should have been enforcing the ones we did have) in the first place. Not much else can account for the contempt and self-entitlement we've seen at all levels in the financial sector.

    As tax payers, we’re lenders and also shareholders in this scenario. CEOs are, in a sense, trustees of public funds here, with concomitant fiduciary duties. But even outside the seven companies the government owns, we might just as easily be employees, or customers of these companies – a Citibank credit card, a GM car, an AIG insurance policy, a BofA bank account. Why is it so far fetched to imply that in addition to the age-old duty of making money, there are other age-old duties to your employees and customers, as well?

  8. Drew Sietsma -

    RiskMetric Group has outlined issues investors should be aware of in regards to executive compensation packages before investing in publicly-traded corporations. The factors outlined by the group are designed to prevent overcompensation of corporation executives. Among these factors are:

    • What benchmarks are used in setting base pay?
    • What are the performance hurdles for variable pay?
    • How do new grants align with current holdings?
    • Are incentives producing long-term alignment of executives’ and shareholders’ interests?
    • What do these non-performance-based benefits say about the pay-setting process?
    • What long-term liabilities are being created?

    RiskMetric Group also suggests that the total annual pay package “should be viewed as a whole in the context of its contribution to overall compensation goals and wealth accumulation opportunities for top executives.” The reason why Executive Compensation packages should be scrupulously evaluated is because too often these packages have been resulted in paying top executives extravagant salaries without providing benchmarks for their receipt. Top executives have enjoyed exorbitant salaries at the expense of the corporations and shareholders who pay them. Without setting benchmarks upon executive compensation, corporations reward executives for partaking in overly risky behavior or for doing absolutely nothing to improve the bottom line of the corporation for the benefit of shareholders.

    Some companies have begun to re-evaluate their executive compensation structures due to political pressure and public outcry against past abuses. DailyFinance has pointed out that Boeing and American Express are leading the way in revamping their executive compensation systems. These corporations have done away with bonuses. Their new plans call for a rewards-based approach tied to corporate performance and require that the executives participate in ownership.

    Some argue that the risk in the rise of these new executive compensation schemes is that top executives will be hired by foreign firms. Personally, I do not think this criticism has merit. Investors should now be aware that compensation schemes not based on a carrot-and-stick system of rewards created an era of overly risky behavior by executives. Our current recession can be tied directly to this risk-taking laissez faire philosophy of corporate governance. Investors should rightly be hesitant to invest in corporations where there is a lack of an incentive-based approach to executive compensation. The Securities and Exchange Commission seeks to further this goal with disclosure rules requiring public companies to disclose risks arising from their compensation policies and practices for executives and nonexecutive officers. These rules should help investors more wisely choose long-term investments in corporations where executive pay is tied to market performance.

  9. I remember that not to long ago there was a pretty controversial issue in the US Presidential race regarding capping Corporate Executive Salary. What happened to this debate? I understand the free-market argument and I can even respect it. That doesn't mean that there isn't room for compromise. Consider a world in which corporate salaries are capped at a mere $10 million. If the executive wants anymore he has to negotiate a bonus system BASED ON PERFORMANCE. Further, maybe part of the executives salary should be in the form of non-negotiable stock. For the period of time executives are working at the firm and at least 1 year out the executives should not be able to sell or trade this stock. It might just use their greed in a more beneficial manner for the American people. Come on people, if these executives can take gambles and risks (see Goldman Sachs) why shouldn't we do the same with their salaries.

  10. I agree professor, public exposure is a powerful tool. However, then you have companies like Toyota, who have been all over the news, for not putting consumer safety first. Yet, Toyota's sales have been up since 2009 ( The only possible reason for this has to be the fact that Toyota has been handing out ground breaking incentives to buy their cars. What happened to public exposure here? The President has even called for a special investigation on the company, and yet people are still flocking to the company. It's sad but people go where the incentives are. HOwever, i do believe that most often, public exposure is is a very powerful tool. If half the practices of the corporations were told to the public, and then they were told how those decisions by the corporations directly effect the people, then we have a different story. The key thing however, is how to connect it to the individual. Case in fact, President Obama has called for corporations that outsource to pay special taxes. many people are outraged over this, because it's infringing on the rights of the corporation. But if the same people were told that because of many billions of dollars have been deprived from the government, because of outsourcing that it contributed to the downfall of the economy. Outsourcing not only takes jobs away from the people within the States, but its billions of dollars in taxes that the government could have had, to, "cushion" the downfall of the economy.