June 10, 2009 -- Three months ago insurance giant AIG, the recipient of around $180 billion in taxpayer aid, incited a national uproar when it dished out $165 million in bonuses. Now the Obama administration is poised to take action to curb executive compensation.
On Wednesday Treasury Secretary Tim Geithner met in Washington with Securities and Exchange Commission chief Mary Schapiro, Federal Reserve Governor Dan Tarullo, and the Ken Feinberg, the new special master better known as the "pay czar."
Two issues are at play here: regulations implementing controls over bailout recipients and broad proposals that would apply to top executives at companies in the financial sector.
"This financial crisis had many significant causes, but executive compensation practices were a contributing factor," Geithner told reporters.
"In considering thse reforms, we start with a set of broad-based principles that - with the help of experts like those we assembled today - we expect to evolve over time. By outlining these principles now, we begin the process of bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system," he said.
The former is tied to legislation initiated by Sen. Christopher Dodd, D-Conn., last winter. As an amendment to President Obama's stimulus bill, the chairman of the Senate Banking Committee capped bonuses for executives at companies receiving funds from the $700 billion Troubled Asset Relief Program.
One new step to address payments at TARP beneficiaries will be the appointment of a so-called "pay czar," set to be Kenneth Feinberg, who oversaw compensation for the victims of the 9/11 attacks, a source familiar with the plan told ABC News. An announcement on these bailout regulations could come later this week.
Meanwhile, the broader compensation reform proposals are expected to be unveiled Wednesday. The presence at the meeting of Schapiro and Tarullo is notable because the SEC and the Fed may gain greater power to address compensation issues.
On Tuesday, testifying before the Senate Appropriations Committee, Geithner spoke about the need to make changes to compensation practices.
"Although many things caused this crisis, what happened to compensation and the incentives that created for risk-taking did contribute in some institutions to the kind of vulnerability we saw in this financial crisis," he told lawmakers. "And my view is that we need to help encourage substantial reforms and compensation structures, particularly in the financial industry, because of the dependence of the economy on a well functioning, more stable, better set of judgments by financial institutions."
"I think boards of directors did not do a good job," he continued. "I think shareholders did not do a good job in terms of discipline and compensation practices. And I think a centerpiece of sensible reforms will be to tie compensation to better measures of long-term investment and return and to adjust them to reflect the risk -- to reflect the risk."
In recent months, the financial industry has voiced its displeasure with pay curbs imposed by the government, arguing that these restrictions limit their ability to attract and retain top talent in a competitive environment.
On Thursday, a top Treasury aide will testify before Congress on compensation practices. Gene Sperling will be appearing before Rep. Barney Frank's House Financial Services committee starting at 10 a.m.
Then next week the administration will roll out its overall financial regulatory reform measures.
On background, an Obama administration official outlined the powers to be given to the new "special master" for compensation at firms receiving government aid. This master will have the power to reject plans from companies that he deems to have excessive or inappropriate salary, as well as the job of reviewing compensation plans for the top 100 salaried employees.
Also, per the official, the administration will propose legislation that will require members of compensation committees to be independent from management and answerable only to the compensation committee and its independent advisers and legal counsel. This, they say, would give the SEC the authority to strengthen the independence of compensation committees similar to the way that Congress previously strengthened the independence of audit committees.
Finally, the official says the administration will voice support for "say on pay" legislation, as President Obama has done in the past, that would empower the SEC to require non-binding annual say-on-pay votes for all public companies. Say-on-pay, the administration believes, will improve directors' accountability to the owners of the company by giving shareholders a way to express their views on pay decisions, and will allow boards and shareholders to work together to design compensation that gives executives strong incentives to maximize long-term firm value.