The question of Wall Street pay has opened a partisan rift over the role of government in setting private-sector salaries.
When federal “pay czar” Kenneth Feinberg testified before Congress Wednesday, Democratic lawmakers focused on what they see as greed and irresponsibility by executives who continue to reap millions in pay after taxpayer bailouts. Republicans expressed worry about overreach by the government itself – warning about unintended consequences of a big-bonus backlash.
Given public concern about both the behavior of Wall Street and Washington policymakers, it’s a debate that’s unlikely to end with Mr. Feinberg’s stoic answers.
It’s extraordinary, after all, for an appointee of the US Treasury to take direct control of compensation practices at some of America’s largest private companies. Feinberg is a “special master” on pay at seven firms, ranging from AIG to Bank of America, because they are getting extraordinary government support.
“Wall Street can no longer be trusted to control itself,” said Edolphus Towns (D) of New York, who chairs the House Oversight and Government Reform Committee. “No doubt there is howling in the executive suites, but I don’t think the taxpayers are going to be shedding any tears over this.”
But Darrell Issa of California, the top-ranking Republican on the committee, worried aloud that government pay caps could create problems, even with a good motive of protecting taxpayer interests. He cited reports of some high-level departures from bailed-out firms, which include automakers General Motors and Chrysler as well as large banks.
“Ford is doing better and Ford is innovating,” Representative Issa said. “Are you concerned they will hire the best and brightest [from GM and Chrysler]?”
'Pay czar' seeks a balance
Feinberg said he is trying to strike a balance on these issues, as his statutory mandate calls for. His top priority, he said, is to foster a pay environment that will give the firms the best chance of repaying the taxpayer bailout money. This means retaining needed talent, he said, but also watching out for taxpayers by curbing excesses in areas such as bonuses and perks.
To Republicans concerned about government meddling in the workings of capitalism, Feinberg stressed that his oversight extends only to seven firms – and to those seven only because the government is now in an ownership position.
“The word ‘czar’ does fit you, and you seem to fit comfortably in the word czar,” said Rep. Mark Souder (R) of Indiana. “It’s still a little scary ... to see one person with this much power over major institutions.”
Democrats, in contrast, worried about the opposite risk – that Washington will have too little transformative influence over incentive practices that ran amok in the financial sector.
“I’m hopeful that the model that we have developed for the seven companies ... might be adopted voluntarily” by others on Wall Street, Feinberg said.
Pay for performance
The Feinberg approach, which he said was developed through consultation with federal officials as well as academic experts, seeks to strengthen the emphasis on performance-based pay. In setting pay last week for the top 25 executives at the firms he oversees, Feinberg sharply cut guaranteed pay – including salary and perks but also bonuses that don’t depend on performance.
He allowed executives to then add to their base pay through stock incentives based on performance over two-, three-, and four-year periods. On top of that, additional performance-based pay hinges on whether the firms repay their TARP funds.
He said executives at the firms have also generally cooperated in renegotiating pay that had been contractually agreed upon before the TARP rescue.
Some compensation experts are skeptical, however, that Feinberg’s approach will succeed in aligning corporate incentives with the interests of taxpayers and the economy.
The debate over the pay czar’s work comes as the economy is struggling to regain its footing after a year of crisis rooted in banking troubles. Many financial firms are set to pay record amounts to employees, however, while the national economy is experiencing nearly 10 percent unemployment.
The Federal Reserve has also entered the fray, however, unveiling plans last week to monitor pay practices at banks as part of its effort to ensure the soundness of the financial system. Beyond that, lawmakers are considering legislation that might give private shareholders more influence on corporate pay.
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