WASHINGTON – Talking tough but stepping gently, the Obama administration rejected direct intervention in corporate pay decisions Wednesday even as officials argued that excessive compensation in the private sector contributed to the nation's financial crisis.
Instead, the administration plans to seek legislation that would try to tame compensation through shareholder pressure and less management influence on pay decisions.
At the same time, the administration drew a sharp distinction between the overall corporate world and those institutions that have tapped the government's $700 billion Troubled Asset Relief Program.
The administration is ready to issue new regulations governing pay at companies that receive TARP assistance, with the toughest restrictions aimed at recipients of "exceptional assistance," such as Citigroup, Bank of America, General Motors and American International Group. The regulations, which follow legislation already passed by Congress, would limit top executives at publicly assisted firms to bonuses no greater than one-third of their annual salaries.
The administration has named Kenneth Feinberg, a lawyer who oversaw payments to families of victims of the Sept. 11, 2001, terrorist attacks, as a "special master" with power to reject pay plans he deems excessive at companies with the biggest injections of public money. Feinberg also would have authority to review compensation for the top 100 salaried employees at those firms.
With one set of policies for taxpayer-assisted firms and a more hands-off approach to the rest of the corporate sector, Obama is straddling what has been an explosive issue with the public and in Congress. Executive pay burst as an issue earlier this year amid disclosures that AIG, the insurance conglomerate, had paid bonuses of $165 million even as it accepted billions from the government.
AIG is among the companies whose pay schemes the government will now oversee. But outside in the broader private sector, the administration chose to use public pressure and the potential for embarrassment, rather than direct pay restrictions.
"We do not believe it's appropriate for the government to set caps in compensation," Treasury Secretary Timothy Geithner said. "We're not going to prescribe detailed prescriptive rules for compensation. All those things would be ineffective, could be counterproductive in some ways."
Geithner said the administration will ask Congress to give shareholders a nonbinding voice on executive pay and to require corporate compensation committees to be independent from company management. That second provision would give the Securities and Exchange Commission authority to strengthen the independence of panels that set executive pay.
"We'd like to see better transparency and accountability, frankly," of executive pay practices, Geithner said.
He said the efforts would reinforce administration compensation guidelines, released Wednesday, that encourage corporate boards to adopt pay packages that reward long-term performance rather than short-term gains and to better manage the relationship between risk and incentive. Those guidelines, or principles, are not enforceable but are meant as a message to corporate boards and to shareholders.
With that policy, the administration appeared to be heeding the concerns of the financial sector.
"There is recognition that if you accept government money, you should be subject to restrictions," said Scott Talbott, the senior lobbyist for the Financial Services Roundtable, an industry group. "Our concern is the government should not set specific dollar amounts and should stick to principles and guidelines, which I believe they will."
But advocates of a stronger government hand were disappointed. Sarah Anderson, an expert on executive compensation at the liberal Institute for Policy Studies, said Obama could have stopped short of pay caps and still used the tax code to regulate executive compensation.
"I don't think the proposals announced today go far enough to address the incentive for reckless behavior that really got us into this economic mess," Anderson said.
In Congress, lawmakers will likely have their own ideas.
On Thursday, officials from the Treasury Department, Federal Reserve and Securities and Exchange Commission are expected to testify about executive compensation before the House Financial Services Committee.
Committee Chairman Barney Frank, D-Mass., said the goal is to ensure salaries and bonuses don't encourage industry executives to take big risks.
"We have a 'heads I win, tails I break even' compensation system in the financial services industry in America," said Frank. "Executives have a perverse incentive to expose their companies to more and more risk, but only the shareholders realize the downside of bad bets."
So-called shareholder "say on pay" legislation cleared the House in April 2007 by a 2-to-1 margin but went nowhere in the Senate. It was opposed by the Bush White House and most Republicans.
Investor advocates, union pension funds and shareholder groups have pushed for the legislation.
As a senator in 2007, President Barack Obama introduced a bill to require companies to allow nonbinding shareholder votes on executive compensation packages, though his proposal wouldn't have limited CEO pay.
During the presidential campaign, Hillary Rodham Clinton also proposed a measure to give shareholders a nonbinding vote on executives' pay packages. In addition, her bill would have required top executives who collect large performance-based pay packages to return the money if financial irregularities are discovered and companies are forced to restate their earnings. It also would have capped the amount that top executives could earn tax-free through deferred compensation.
Obama and his economic team have been trying to temper the populist urge to cap salaries while at the same time make the case that compensation practices contributed to the current crisis by encouraging high risks.
Sen. Frank Lautenberg, D-N.J., encouraged Geithner to act. "We've got to change corporate culture that says the leadership at the top can often take its compensation without regard for what happens with the employees or the future investing or the well-being of the company and taxpayers," he said.