By Silla Brush and Michael O’Brien - 06/10/09 08:20 PM EDT
The Obama administration on Wednesday announced a broad new effort intended to curb excessive corporate pay and empower shareholders with a greater say on compensation practices across corporate America.
The proposals, requiring congressional approval, are already sparking a major lobbying battle between big business, unions and some activist shareholders who have yearned for years to have a greater role in management decisions.
“I want to be clear on what we are not doing: We are not capping pay,” said Treasury Secretary Timothy Geithner. “Companies should seek to pay top executives in ways that are tightly aligned with the long-term value and soundness of the firm.”
Hundreds of senior executives at the seven firms — American International Group (AIG), Citigroup, Bank of America, General Motors, Chrysler, GMAC LLC and Chrysler Financial — will quickly face onerous new restrictions under the office of Kenneth Feinberg, a Washington lawyer, whom the administration named on Wednesday to be the “special master.”
The bonus pay issue reached a fever pitch earlier this year when it was disclosed that AIG had plans to pay $165 million to traders in the complex products that brought down the insurance firm and prompted the government to commit $180 billion to it. The proposal would also curtail “golden parachutes” for executives and impose additional disclosure policies.
“These are private-sector employees that, in many ways, have their job based on the extraordinary assistance that has been provided by taxpayers to ensure that they can continue to have their job,” said White House press secretary Robert Gibbs.
Feinberg’s office would have the power to reject compensation plans it deems “inappropriate, unsound or excessive,” and companies would then be required to resubmit pay plans, a senior administration official said.
The proposal regarding the seven firms is a scaled-back effort on compensation standards for firms receiving a heavy amount of government aid. Earlier this year, the administration had proposed capping executive salaries at $500,000. A senior administration official said, however, that there would be a “safe harbor” for firms that already complied with the $500,000 cap and restrictions on stock incentives.
The announcements represent an attempt by the administration to strike a balance between the federal government having a say in pay incentives that many argue contributed to the financial crisis and not explicitly setting compensation ceilings.
Congress will likely take up the issue quickly, at least in the House, where Financial Services Committee Chairman Barney Frank (D-Mass.) has a hearing scheduled for Thursday on the issue. On Wednesday, Frank was skeptical that the administration’s efforts to bolster the independence of compensation committees would have much effect.
“I believe that we should be going beyond the proposals the secretary makes with regard to the compensation structure,” Frank said.
Democratic Sens. Charles Schumer (N.Y.) and Maria Cantwell (Wash.) proposed a similar bill in May that includes several parts of the administration’s plan.
Obama called for new authority that would require companies to hold annual non-binding “say on pay” votes intended to bolster shareholder rights. The administration also called for a new effort to ensure the independence of compensation committees from the heavy hand of management.
Those are proposals that unions and shareholder-rights groups have been urging for years.
The proposal on “say on pay” is similar to legislation that Obama sponsored in 2007 in the Senate, but that was not passed. While the provision would be non-binding, several outside observers cautioned that it could still have an impact in changing the behavior of corporate America.
“This is not a trivial thing,” said Douglas Elliott, an expert on financial and economic issues at the Brookings Institution. “No management likes to be publicly rebuked by the shareholders too much.”
Elliott said the administration was wise to avoid the “radical” approach of determining how much a company can pay executives. “There is no evidence at all that the government is any better at setting compensation levels than private industry, and there is plenty of reason to think that it is the other way around,” he said.
Paul Hodgson, analyst at the Corporate Library, said the “say on pay” votes would have an impact in a small number of cases where shareholders could prove an effective counterbalance to management.
“Certainly, at the majority of companies, there aren’t going to be significant enough problems for shareholders to vote against the pay package. That’s going to be the case for 95 percent of companies,” he said. “But there will be a small group of companies where pay is just so out of line or a particularly bad decision has been made that year where shareholders will get organized to get majority support for a ‘no’ vote.”