AIG, GMAC and Chrysler executives see restrictions on their cash compensation.
Even as the recession and aftershocks of the financial industry collapse start to ease, the companies that were forced to take government bailouts continue to feel the ramifications. Ken Feinberg, whose official title is Special Master for TARP Executive Compensation, but who is fondly referred to as the “Pay Czar,” yesterday ordered five companies overseen by the Obama administration to cut cash compensation to top executives by 33 percent.
As a result, total pay in 2010 will fall by about 15 percent for 119 executives at AIG, General Motors Co., GMAC, Chrysler Group LLC and Chrysler Financial Corporation. And while Feinberg only has control over companies that were bailed out, he told KPCC’s Patt Morrison that other Wall Street companies seem to be following suit in reducing executive compensation.
“Well, remember I don't have direct jurisdiction over the rest of Wall Street but I must say, the early signs, at least, are that some of the companies on Wall Street are trying to comply voluntarily with these restrictions or these prescriptions that I have articulated,” said Feinberg. “Now we will have to wait and take a look in the long term. Wall Street memories are short and they forget quickly. But hopefully we will see some institutional change over the long term in how Wall Street determines compensation for it's own officials.”
Patt asked Feinberg about the important distinction in cash versus stock compensation, especially considering the gimmicks previously used by corporate executives to artificially inflate the value of stock options.
Ken Feinberg: It amounts to a program where there are... the cash based salary is generally under $500,000 for 2010, some of them quite under $500,000. The total compensation consists of that salary plus stock, but stock which cannot be redeemed by the official for two, three, four years. So that the total compensation of these individuals will be tied, in large part, to the overall success of the company.
Patt Morrison: Which was not always the case in the past. They were able to in some cases, to inflate these, these stock values and get out while the getting was good.
KF: Well, there were two devices that were common before. One is huge cash salaries. Money in the bank guaranteed so that you could take excessive risk knowing that your cash was protected. The second device was the use of stock, which could be immediately transferred or sold after, you know, a couple of days. We require that the stock be held a third for two years, a third of it for three years and a third of it for four years. So, long term performance will be the test not immediate short term gain.
PM: How does this compare to some of these cash salaries that were being taken home by executives at this level before?
KF: Oh! Our cash salaries have been reduced, under this program, by about 90 percent.
PM: Nine-zero percent.
KF: But the overall compensation has been reduced by about 50 percent. Oh, this year probably by about, that was as of last year, this year probably by about 15 percent. So we continue to make substantial reductions in the top officials but only at these five companies because these are the five companies that received the most taxpayer assistance and have not yet repaired it.
One industry that’s been an ancillary victim of Ken Feinberg’s quest to keep executive compensation under control is divorce attorneys, who complained to the Bloomberg News that restrictions on bonuses were forcing divorce proceedings to grind to a halt — and Feinberg seemed less than concerned.
PM: There was a story on Bloomberg and I had to make sure it was Bloomberg and not The Onion, maybe you've seen it? Divorce attorneys and advisors in New York saying that restrictions on bonuses, not with your five companies but across the board, are making it harder for bankers to get divorces. They are having to take their children out of private schools, may have to sell second homes and it, it, it goes back to what you said about the disconnect between Wall Street and Main Street.
KF: Spare me. I never realized that my pay practices would have an adverse impact on divorce rates or fees that lawyers make in handling divorces. I have enough problems dealing with the statute and the challenge of fixing pay for these officials without worrying about some of that spillover effect on the divorce rate.
To hear the full interview with Feinberg, visit the Patt Morrison page.