Obama looks to overhaul executive pay

The Obama administration, arguing that misaligned corporate incentives fueled a financial crisis, is urging an overhaul for the way America's top business executives are paid.

The proposed changes could have a sweeping impact over time on an issue that has stirred public outrage for years – and amplified during the recession. But the new pay plan appears to be guided more by economic pragmatism than by populist ire. President Obama has occasionally lashed out at Wall Street, but the pay proposals were announced with little fanfare in a statement issued Wednesday by Treasury Secretary Timothy Geithner.

The proposed steps include a blend of legislation, regulation, and friendly advice:

• Supporting efforts in Congress to pass "say on pay" legislation, which would give shareholders a much larger voice on compensation packages at individual firms.

• Proposing legislation enabling the Securities and Exchange Commission to ensure that corporate compensation committees are more independent of management.

• Working with bank regulators in new efforts to reduce the risk of booms and busts in the financial sector, partly by addressing pay incentives that encouraged high-risk activities.

• Laying out principles of sound compensation at banking firms and beyond – notably that pay should take account of risk as well as profit, and that performance should be measured over a long span of time.

Efforts by policymakers to influence corporate pay have often failed to work, but it's possible that the Obama administration framework will have more of an impact for two reasons. First, it comes as investors and corporations already feel financial pressure to change pay practices. Second, the administration's plan seeks to partner with the private sector more than dictate to it.

"The overall environment for executive pay is lending itself to increased conservatism – regardless of what industry you're in," says David Wise of Hay Group in New York, which provides compensation consulting services. "The administration is focused on arming shareholders with as many tools as possible to hold their companies accountable. That’s what the [Obama pay] principles signal to me."

'Say on pay' could take time

Even if the administration's effort is successful, it will probably take some years for the evidence to roll in.

Mr. Wise notes that "say on pay" is a privilege American shareholders aren't used to exercising. At the few companies where votes on pay have been taken, the typical outcome is for shareholders to give strong support for the packages put in place by the board's compensation committee.

But he says that over time, “say on pay” could have teeth. In Britain, shareholders have long voted on pay "and many people do believe that it has been responsible for slowing the rate of pay increases," Wise says.

The board committees that set compensation for executives – everything from bonuses to perks and stock options – operate in a zone between the shareholders who own companies and the managers who run them.

1 | 2

Next