Obama's Pay Czar Slashes Executive Compensation

25 execs of 7 companies getting taxpayer dollars to see their salaries cut.

October 22, 2009, 7:07 AM

Oct. 22, 2009 — -- President Obama's pay czar said he tried to balance competing arguments before moving to cut salaries of 25 executives at seven firms that have received federal bailout money.

"I've tried to balance both sides, listening carefully to what is said in the way of citizen anger and also the statute, which requires that these companies stay in business and thrive so we get repayment," the pay czar, Kenneth Feinberg, said in an interview with ABC News.

Seven companies receiving "exceptional" amounts of taxpayer aid will slash the annual salaries of their 25 top executives by an average of 90 percent from 2008 levels.

Feinberg, who was appointed at the Department of the Treasury to manage compensation issues for companies receiving federal bailout money, said he hoped other companies will follow in the same footsteps but that it's not the government's place to impose any laws on executive compensation.

"I'm hoping that, using these seven companies as a template or as a model, that other companies will voluntarily see the wisdom of the way we've structured compensation -- less cash, more long-term stock tied to the financial future of these seven companies. Hopefully others will see the wisdom of this and follow suit voluntarily," Feinberg said.

But he added, "This is a unique situation involving these seven companies who are, in effect, owned by the taxpayer. I do not think it wise nor prudent to expand the jurisdiction of what I'm doing now."

Obama today praised the move to cut executive pay by his pay czar.

"This is America," Obama said. "We don't disparage wealth. We don't begrudge anybody for doing well. We believe in success. But it does offend our values when executives of big financial firms that are struggling pay themselves huge bonuses even as they rely on extraordinary assistance to stay afloat."

Saying that Feinberg has taken "an important step forward today," the president said that more work needs to be done, and called on Congress to pass legislation giving shareholders a voice in executive pay packages.

The seven companies receiving "exceptional" amounts of taxpayer aid will slash the annual salaries of their 25 top executives by an average of 90 percent from 2008 levels.

The cuts apply to executives of AIG, Citigroup, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial, which still owe a considerable sum of taxpayer dollars.

Overall, the total compensation for the 25 executives, including yearly bonuses and retirement pay, will be cut by an average of around 50 percent. Additionally, any of the 175 executives who want more than $25,000 in special perks -- such as private planes, limos, company cars or country club memberships -- will have to receive government permission first.

Combined, the executives have received almost $300 billion in taxpayer dollars, more than the gross domestic product of South Africa or Portugal.

Responding to criticism that curbing pays might cause an exodus of top talent and in fact hurt the companies and American taxpayers, Feinberg said "it's a big concern" but that his "primary obligation here is to make sure under the law that the taxpayers get their money back that was lent to these companies."

"And I had to take into account, making sure as best I can, that these companies thrive so that the taxpayers get their funds back.," Feinberg told ABC News. "Every year we take another look, at compensation now for 2009 then 2010 we will revisit exactly the progress of these companies in terms of repaying the taxpayer, and we'll take another look at that time."

Feinberg: Being Czar 'Very Very Difficult' Job

At a news conference today, Feinberg called his assignment as pay czar "very very difficult," having to balance public outrage while also adhering to his duties under the law.

"The real challenge for the special master was to balance on the one hand, 'Mr. Special Master, these companies owe the taxpayer billions of dollars -- get that money back!' versus, 'Special master, make sure that you don't pay and reward excessive risk in getting that money back, make sure that key people stay on the job in order to get that money back, make sure that you offer the correct pay package,'" he said.

Feinberg said that his office found every company's pay package submission to be "inconsistent with the public interest."

"They were both too high and there wasn't the right degree of mix of cash, stock, salaried stock and long term stock," he said. "There is entirely too much reliance on cash. There has got to be a better way to tie corporate performance to long-term growth so the taxpayer can get its money back."

He described the negotiations with the seven companies as "very very cooperative" but also -- in some cases -- "very intense."

The rulings by Feinberg cover this year's salaries for November and December only, not before. Just three months from now, in January 2010, these companies -- assuming they have not repaid taxpayer money -- will again have to go through the process with Feinberg.

He said he was very aware of the widespread public outrage about big pay packages at bailout recipients. But he added, "That outrage didn't impact my legal obligation to follow the statute and the regulations in determining pay. Nowhere in the statute does it say that I should take into account public outrage or what Wall Street thinks."

On White House involvement, Feinberg stated unequivocally, "There's been zero intervention by the White House in this entire process."

Feinberg said his rulings were final and "I'd like to think there are no loopholes," but added that companies could appeal to his office during the next 30 days.

Feinberg acknowledged earlier this week that the move won't exactly make him the most popular man on Wall Street.

"When I issue these packages, I suspect I'll move to Pluto, which will be too close to Earth," Feinberg joked Tuesday at a Washington, D.C., conference held by the National Association of Corporate Directors.

Americans are likely to approve of the new rules. Nearly a year ago, the image of chief executives of three U.S. automakers boarding private luxury jets to travel to Washington, D.C., to ask lawmakers for bailout funds touched off a public firestorm. An ABC News/Washington Post poll this month showed that 71 percent of Americans supported such a move.

Even some conservatives, including Sen. Richard Shelby, R-Ala., who opposed the stimulus and bailout, said Feinberg is being a good steward of tax dollars.

"If these people run the companies well, they should be rewarded -- but at the same time we shouldn't forget about who put the money in there," Shelby told ABC News. "It's not private capital, it's the U.S. taxpayers' money."

But there are critics who say the government shouldn't determine corporate salaries, even if those firms are taking taxpayer dollars.

"If you wind up having second-rate people in your companies because you can't pay them enough, that is presumably going to hurt the rest of us because our economy won't be as dynamic," said Dan Mitchell, a senior fellow at the libertarian think tank the Cato Institute.

Taking Aim at Corporate Perks

Feinberg was appointed by the administration in June to oversee executive pay at seven companies receiving what the administration has deemed "exceptional assistance" from the government bailout.

"Ken Feinberg has done a commendable job of applying the strong compensation standards of the Congressional legislation to the companies that received exceptional assistance from the government," Treasury Secretary Tim Geithner said in a statement. "We gave him the difficult task of cutting excessive pay, striking a balance between compensation and risk-taking, and keeping strong management teams in place to help the companies recover -- all in the public interest. We all share an interest in seeing these companies return taxpayer dollars as soon as possible and Ken today has helped bring that day a little bit closer."

AIG, which has received government approval for a record $180 billion in taxpayer aid, will reduce compensation for its top 25 executives to less than $200,000 total, a source told ABC News. Executives in the company's financial products unit -- which brought the insurance giant to its knees with risky deals -- will not receive any other compensation in the form of stocks or stock options, the source added.

Earlier this year, the insurance giant created a public uproar when it dished out $165 million in retention payments. In March 2010, the company was set to pay out another $198 million, which Feinberg asked them to scale back, according to a recent report by government watchdog Neil Barofsky.

The administration has been vocal in its displeasure with Wall Street pay, especially after bailout recipient Goldman Sachs said it was set to pay a record $23 billion in bonuses this year.

"The bonuses are offensive, and to the firms that still have federal TARP money, there's some jurisdiction: The pay master of Treasury is working on trying to limit that," David Axelrod, senior adviser to President Obama, said Sunday on "This Week with George Stephanopoulos." "You've seen a lot of firms go to stock rather than cash -- so at least people have a stake in the success of their company, and they're not just walking away with cash-making short-term decisions.

"They ought to think through what they are doing, and they ought to understand that a year ago a lot of these institutions were teetering on the brink and the United States government and taxpayers came to their defense," Axelrod said. "They have responsibilities and they ought to meet those responsibilities."

News of Feinberg's work to reduce compensation already had emerged in recent weeks. His work with Citigroup led the bank to sell its Phibro division, run by Andrew Hall, a trader who raked in a $100 million bonus this year.

Meanwhile, outgoing Bank of America CEO Ken Lewis, following conversations with Feinberg, agreed to receive no salary or other pay for 2009.

"I would have been surprised if it had led to anything else in light of the unique -- or not so unique -- facts of that individual case," Feinberg said.

However, Lewis will still receive a sizable retirement package, reportedly upwards of $50 million.

Bob Stickler of Bank of America was among the officials at the bailed out companies who declined to react Wednesday to early reports of what Feinberg planned to say -- though as with officials at Chrysler Group and GMAC, he acknowledged Bank of America had been talking to Obama officials about executive pay.

"We have no comment at this time as we have not been officially notified," Stickler said Wednesday. "We have been in talks about our top earners for several months."

Today, the Federal Reserve also issued a proposal to make sure that incentive structures at banks do not pose a risk to the safety of firms.

The nation's central bank, officials said, is taking this action because the financial crisis has revealed that inappropriate compensation structures can cause safety and soundness problems at banks -- and, in turn, problems for the overall system.

ABC News' Huma Khan and Charles Herman contributed to this report.

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