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October 29, 2009
Cracking Down on Excessive Executive Pay
Last week, the U.S. Federal Reserve and Department of the Treasury separately moved to assert greater oversight over corporate compensation. The hunt for excessive executive pay continues...
On Thursday, the United States Department of the Treasury moved to significantly reduce compensation for top executives of bailed-out banks, announcing that it is ordering the seven big companies that have yet to pay back massive taxpayer bailout cash to cut the total compensation for top executives in half. The pay cuts will take effect next month.
According to Reuters, some individuals may see their pay package reduced by up to 90 percent. Incentives or bonuses must be paid in long-term restricted company stock. The rulings also limit corporate perks; personal expenses for executives are capped at $25,000 per year, with limited exceptions that can be justified to and approved by the Treasury.
Meanwhile, the Federal Reserve on the same day issued a sweeping proposal designed to get banks to remove incentive compensation packages that might put institutions at risk. The proposed rules, still in provisional form and subject to comment for 30 days, are part of an effort to toughen supervision to avoid a recurrence of the near-meltdown of the financial system last year.
The government's move "is a seismic shift," Espen Eckbo, director of the Center for Corporate Governance at Dartmouth College's Tuck School of Business, told the Wall Street Journal (subscription required).
The Obama administration and a number of analysts believe skewed compensation incentives played a key role in the run-up to the financial crisis.
"Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability," Federal Reserve Chairman Ben Bernanke said.
In addition to capping pay at firms that still owe the government and taxpayers money, the Treasury Department is pushing some corporate-governance reforms onto firms that received exceptional Troubled Asset Relief Program (TARP) assistance. These reforms include "a forced separation of the positions of chief executive and chairman of the board," the Christian Science Monitor reports.
The Fed proposal does not enforce hard pay caps. Instead, regulators will review compensation programs to ensure rewards are for long-term performance rather than short-term gains. When appropriate, the Fed could take "enforcement action to ensure that material deficiencies that pose a threat to the safety and soundness of the organization are promptly addressed."
After the furor over AIG bonuses in March, it's no surprise that many Americans remain outraged at some of the large Wall Street incentives still in place despite the current financial crisis.
From 2006 through 2008, the top five executives at the 20 banks that accepted the most federal bailout funding averaged $32 million each in personal compensation, according to the recently released 2009 Executive Excess report from the progressive Institute for Policy Studies.
"Long before the current financial crisis, executive compensation was generating debate and controversy, with many in the investment community and the general public viewing executive pay as too generous, insufficiently related to performance and too often rewarding short-sighted behavior," according to a new report on executive pay from The Conference Board Task Force on Executive Compensation.
The usual argument for huge salaries and bonuses is that they are necessary to keep top talent. This may be partly true, but are today's executives really hundreds of times more capable than average workers?
"A generation ago, typical big-time corporate CEOs seldom made more than 30 or 40 times what their workers took home. In 2008, the IPS report shows, top executives averaged 319 times more than average U.S. worker pay," the IPS said in an announcement of the report.
Much of the debate over executive pay reform has revolved around questions of corporate governance, such as the role of shareholders.
"Shareholders of American companies and the public deserve to see executive compensation programs that serve shareholders' interests and are explained to shareholders in thoughtful dialogue," Robert E. Denham and Rajiv L. Gupta, co-chairs of The Conference Board Task Force on Executive Compensation, recently said in a statement.
The task force last month issued its report and recommendations that set forth "guiding principles" for corporate institutions to restore credibility and increase trust in pay practices and oversight.
The "guiding principles" state that public companies should do the following:
- Establish a clear link between pay, strategy and performance;
- Provide compensation that is fair, affordable and clearly aligned with actual performance;
- Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance — such as excessive golden parachutes, overly generous severance arrangements, gross-ups of parachute payments or perquisites and golden coffins — unless specific justification exists;
- Demonstrate credible board oversight of executive compensation; and
- Foster transparency in compensation practices and appropriate dialogue between boards and shareholders.
Do you think the provisions announced last week will be enough to curtail excess compensation? Are the measures too stringent? Let us know in the comments section below.
Related
Are Executive Pay Caps the Solution?
Pitchfork Friday: Executive Bonuses at Failed Firms? Cue the Public Outrage
The Party is Over. But Not Really
Scandal, Ego and Inflated Self-Worth Deserve Big Bucks
Resources
The Special Master for TARP Executive Compensation Issues First Rulings
U.S. Department of the Treasury, Oct. 22, 2009
Factbox: Details of Pay Czar Rulings on Bailout Firms
by David Lawder
Reuters, Oct. 22, 2009
Federal Reserve Issues Proposed Guidance on Incentive Compensation
U.S. Federal Reserve, Oct. 22, 2009
Proposed Guidance on Sound Incentive Compensation Policies
Board of Governors of the Federal Reserve System, Oct. 27, 2009
Pay Czar Moves Represent 'Seismic Shift' (subscription required)
by Joann S. Lublin and Louise Radnofsky
The Wall Street Journal, Oct. 21, 2009
Executive Compensation Determinations for Top TARP Recipients
U.S. Department of the Treasury, Oct. 22, 2009
Wall Street Pay Cuts Ordered by Treasury
by Peter Grier
The Christian Science Monitor, Oct. 22, 2009
America's Bailout Barons
by Sarah Anderson, John Cavanagh, Chuck Collins and Sam Pizzigati
Institute for Policy Studies, Sept. 2, 2009
Executive Excess: America's Bailout Baron (PDF file)
by Sarah Anderson, John Cavanagh, Chuck Collins and Sam Pizzigati
Institute for Policy Studies, Sept. 2, 2009
The Conference Board Task Force on Executive Compensation
The Conference Board, Sept. 21, 2009
...Task Force on Executive Compensation Recommends Corporate Practice Reforms
The Conference Board, Sept. 21, 2009
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Comment
5 CommentsIt is rather easy to imagine how top execs being paid 300X the wages of their average employee end up with an incredibly skewed perspective on value!
I abhor excessive involvement of government in setting prices and wages most of the time, but perhaps the execs whose wings are now being clipped for lousy performance in the face of incredibly bloated pay should have considered the risks of their behaviours. Did they imagine the shareholders and others would never notice, no matter their corporate performance? Alas, it seems they did not imagine that from their rarified perches! Alternatively, they might take their rewards in past as more than adequate compensation for those risks of being caught with their hands in the cookie jar. (Where, by the way, are the directors of those firms? Are they too altogether bloated and careless?)
In any event, citizens and shareholders, often the same people, should find some comfort in a whiff of reality returning to exec compensation in publically traded companies.
Small pity to those who must now stuggle by on a few million a year down from 10s of millions. I wonder if their performance, dismal as it was in many cases, will also reduce by half or more now? Or if it improved by a factor of 10 from previous generations?
October 29, 2009 3:30 PMYour captcha lost half of my comment it is unreadable. forget it!
October 29, 2009 4:09 PMThe federal government needs to stay out of private corporate compensation, health care programs, support of alternative lifestyles and a whole host of other things that - according to the U.S. Constitution - they have no business pocking their noses into in the first place! Big government has to go!
October 29, 2009 6:49 PMInteresting the article and sources neglect to acknowledge that executive pay is determined by a board of directors rather than the executive. If these executives don't perform, the market will deal with them better than a Pay Czar. Making pay a political issue smells to high heaven. (IMHO the bailouts never should have happened in the first place- bankruptcy would have reduced excessive salaries to zero without governmental influence)
October 30, 2009 4:32 AMThomas Jefferson: "A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor and bread it has earned -- this is the sum of good government."
November 2, 2009 2:03 PM
