Pay Czar: Company Comp Plans Were Flawed

Pay “czar” Ken Feinberg was on Capitol Hill this morning laying out his rationale for slashing executive compensation at seven TARP-funded companies (AIG, Bank of America, Chrysler, Chrysler Financial, Citigroup, GM and GMAC).

Feinberg told a House panel that in developing his plan he considered, and rejected, pay proposals from six of the seven companies. Each of those was flawed, he said, as follows:

• The companies requested excessive guaranteed cash — salaries and bonuses — for company executives
• The companies requested that stock issued to these executives be either immediately redeemable or redeemable without a sufficient waiting period
• Many of the companies did not sufficiently tie compensation to performance-based benchmarks and metrics
• Many of the companies did not sufficiently limit or restrict financial “perks,” such as private airplane transportation, country club dues and golf outings, and in some cases provided excessive levels of severance and executive retirement benefits
• The companies did not make sufficient effort to fold guaranteed compensation contracts — entered into prior to the enactment of the current compensation regulations –- into 2009 performance-based compensation

Apart from the perks problem, the common theme here is that the companies don’t do enough to link pay to their long-term financial performance. Feinberg’s solution involves basing executives’ pay more on restricted stock, rather than cash, that may only gradually be redeemed over three installments beginning in 2011. Said Feinberg:

The objectives are clear — to tie individual compensation to longer-term performance metrics, and to encourage senior executives to remain at the company for a period of years to maximize their personal benefit from the overall profitability of the company itself.

Feinberg also underscored that his authority as “Special Master” on corporate pay should be confined to the seven companies in question. Yet he reiterated his wish that other companies use the new rules as guidelines in revising their own compensation practices.

My limited mandatory jurisdiction involving just these seven companies is justified by the fact that the American taxpayers have a vested interest as particularly significant stakeholders in these seven companies. But the federal government should not enter the business of micromanaging compensation practices beyond these seven companies by expanding my jurisdiction or broadening my discretionary authority.