Kenneth Feinberg, President Obama's “pay czar,” last week capped and restructured the salaries of top executives at seven embattled corporations that have not yet repaid the help they received from the federal government last year.
The top 25 executives at these firms saw their cash compensation cut — by as much as 90% in some cases — and their other compensation converted to restricted stock that may be sold only in one-third increments beginning in 2011, or earlier if the government aid is repaid.
This seems fair enough to most observers, as the government either owns large pieces of affected companies, e.g., American International Group Inc.,
Citigroup Inc. and General Motors Co., or lent them large sums that enabled them to survive, or both.
Unfortunately, Mr. Feinberg was unable to restrict the compensation at The
Goldman Sachs Group Inc. or JPMorgan Chase & Co., both of which received government aid, because they had repaid it. That is a pity because Goldman and Morgan have profited handsomely from the government's actions, e.g., preventing the collapse of
AIG, which was the counterparty to many of Goldman's credit default swaps, and from being able to borrow from the
Federal Reserve at an interest rate of less than 1% and lend at more than 3.5%. Their bonuses thus were financed at least in part by taxpayers.
The
Federal Reserve and Congress are considering additional steps the government might take to rein in compensation practices in general at public companies, and in particular those that led to risky behavior at financial companies. As they consider those steps, they should keep in mind the principles Mr. Feinberg said guided his decisions in structuring the revised compensation packages for the seven firms.
His principles also should be kept in mind by compensation committees at all corporations. They are: First, pay practices for top executives should align compensation with long-term value creation and financial stability. Second, compensation should be reduced significantly across the board. Third, salaries should be paid in company stock over the long term, and incentive compensation should be paid in the form of restricted stock and be performance-based.
The fight against excessive compensation will not be won solely by these guidelines.
Mr. Feinberg did not have to deal directly with the problem of overgenerous compensation committees, overweening egos of chief executives and the influence of compensation consulting firms. Congress will have to help provide the compensation committees with some backbone by giving shareholders at least an advisory vote on corporate top-level compensation packages.
Companies also should be re-quired to publish the proposed compensation packages prominently near the top of proxy documents sent to shareholders and explain how they met Mr. Feinberg's standards.
However, such shareholder vote requirements will have little influence on compensation committees if institutional shareholders, such as mutual funds and pension funds, continue to vote reflexively in favor of management proposals and if individual shareholders continue to fail to vote their proxies.
Perhaps Congress, as part of any legislation requiring an advisory vote by shareholders, could require institutional investors to reveal how they have voted on the compensation packages and their reasons for doing so.
This might shame the mutual fund and pension fund trustees into thinking more seriously about what is in the best interests of all shareholders when they vote on compensation packages and other proxy items, and might also educate individual investors on the importance of voting their proxies.
If these steps are taken, the compensation practices at publicly held U.S. corporations likely will be seen as fairer by shareholders and the general public.
