Obama Introduces 'Pay Czar' and 'Say on Pay'
The Obama Administration took additional steps to rein-in executive compensation today by announcing the appointment of a "pay czar" at the White House and announcing proposed principles for regulating executive compensation where authority exists to do so. They also asked for legislation to advance the concept of giving shareholders a "say on pay." The suggested principles are not as prescriptive as some may have feared, but taken together, today's proposals and actions are generating some concerns about how the rules of the game are being changed.
Early in the day, Treasury Secretary Geithner unveiled the administration’s approach to regulating executive compensation practices at financial institutions and publicly-traded companies. In order to “encourage sound risk management” and to align pay practices with long-term corporate health, the administration laid out the following broad principles:
- Tie compensation to performance—condition performance-based pay on internal and external metrics, not just stock prices.
- Structure compensation “to account for the time horizon of risks”—condition compensation on and align incentives according to longer term performance.
- Align compensation with sound risk management—because some compensation packages “unintentionally encouraged excessive risks” and because risk managers often do not have enough authority to stop such practices, “compensation committees should conduct and publish risk assessment of pay packages” to avoid “imprudent risk-taking”
- Scrutinize golden parachutes and supplemental retirement packages—question whether such packages align with shareholders’ interests, enhance companies’ long-term value, provide incentives for stronger performance, and reward executives even when shareholders lose value.
- Promote transparency and accountability in setting compensation—encourage Congress to pass “Say on Pay” legislation giving shareholders non-binding votes on executive compensation and legislation giving the SEC authority to require companies to establish independent compensation committees along the lines of the independent audit committees established under the Sarbanes-Oxley Act
In addition to proposed legislation, Treasury said bank regulators, led by the Federal Reserve, will integrate the administration’s compensation principles into bank supervision. Indicating a recognition of the fears that the administration would be over-reaching with its proposals, Secretary Geithner said clearly what the administration is not doing
“We are not capping pay. We are not setting forth precise prescriptions for how companies should set compensation, which can also be counterproductive.”
Instead, the Secretary hopes for standards that “reward innovation and prudent risk-taking . ”
Later today, the Administration announced the appointment of Kenneth Feinberg, a Washington lawyer and former staffer to Senator Kennedy, as the White House "pay czar." His primary authority is to review the compensation levels at firms receiving "extraordinary assistance" under the TARP program and to take steps to ensure their compensation practices are "sound and appropriate."
News reports indicate that seven firms fall into this category—AIG, Citigroup, Bank of America, General Motors, GMAC, Chrysler, and Chrysler Financial. We are also hearing that Feinberg will be looking at the pay policies affecting the top 100 executives at each of the companies—not just the top 25 as mandated by the provisions in the stimulus legislation passed earlier this year. This deepening of the federal involvement in these firms is likely to cause some consternation in executive suites beyond just those directly affected.
Today's announcements set in motion regulatory, legislative and policymaking processes that will take several months to unfold. As details are discussed, additional issues are sure to arise. Financial Reform Watch will be tracking them closely.
Treasury: 'Providing Compensation Committees With New Independence' Fact Sheet (PDF)
Treasury: 'Ensuring Investors Have A "Say on Pay"' Fact Sheet (PDF)
