A Watershed Moment for Intervention

October 22, 2009 6:12 PM EDT

In what was described in the Journal as a watershed moment for government intervention into the private sector, Kenneth Feinberg, the U.S. Treasury Department’s Special Master for Compensation – aka the "Pay Czar" – today made it official: Companies that required massive government bailouts will see executive compensation cut by 90%.

Although the concept was widely reported yesterday, today Mr. Feinberg announced that cash salaries for top executives are to be capped at $500,000 and total compensation will wind up being cut by 50%. The seven firms affected include American International Group (NYSE: AIG), Bank of America (NYSE: BAC), Citigroup (NYSE: C), General Motors, Chrysler, GMAC, and Chrysler Financial.

President Barack Obama welcomed Feinberg's actions. The President said, "He's taken an important step forward today in curbing the influence of executive compensation on Wall Street while still allowing these companies to succeed and prosper, but more work needs to be done." However, it is interesting to note that only three of the seven companies involved are actually related to “Wall Street.”

Wall Street has clearly been a favorite target of President Obama’s and his administration. Thus it is safe to say that the President is eager to show that his administration understands the public furor over Wall Street bonuses and is taking action to even the score given the nearly 10% rate of unemployment on Main Street.

Feinberg was charged by the Administration with reworking the compensation contracts for the 25 highest-paid employees at the seven firms. The long-awaited decision will go into effect on November 1. And since the November/December period is when year-end bonuses are determined, today’s move will have a dramatic impact on the pay of these executives.

CNBC reports that Feinberg largely pushed base salary payments into the form of stock that cannot be touched for years and bonuses granted in the form of long-term stock. The new Pay Czar said, "What I learned through this whole experience is there is entirely too much reliance on pay in cash."

Whether or not you view this move as justified (64% of those surveyed on CNBC said “no” to this question yesterday), there is no denying the landmark move taken by the government Thursday. While there may be historical precedent, we are not familiar with the U.S. government ever reaching quite this far into the private sector before.

In addition to the moves by the Pay Czar, who technically works for the Treasury Department, the Fed also came out with a set of rules and guidelines for executive compensation at banks on Thursday.

According to the WSJ, the Fed is proposing that it more aggressively regulate compensation practices at banks under its control, including thousands of U.S. banks as well as the American subsidiaries of overseas firms.

Ben Bernanke said that the Fed "is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."

However, in the Fed proposal, the Central Bank is not promoting pay caps or banning any particular pay practices. Bernanke suggested that a "one size fits all" approach is not appropriate here. Instead, the Fed plans to review the compensation policies at the nation's largest banks in order to attempt to insure that pay practices don’t encourage employees to take on excessive risk.

Given that both announcements came on the same day, it appears that the Fed is trying to dampen fears that key employees at companies affected by Feinberg’s rulings will quickly jump ship and leave the firms owing the government money devoid of human capital. The thinking here is that since the Fed will be reviewing all comp at banks on a case by case basis, banks not under Feinberg’s jurisdiction would not have an unfair advantage with regard to recruiting talent.

However, given the competitive nature of Wall Street, we have serious reservations about the idea.

** For More of David Moenning's Market Analysis, Stock Portfolios, and Trading Ideas, visit: TopStockPortfolios.com

Related Categories

Contributors

Stocks Mentioned

Related Entities

• UBS
• Chrysler LLC
• Ben S. Bernanke
• Citi
• Banc of America
• David Moenning
• GMAC
• Barack Obama

Comments

Add Your Comment

Name

Subject

Body

Verification can't see the text?
click here to refresh the image.
what's this?