Posted on 27 Jul 2009
Preparing to vet the compensation at businesses receiving major federal aid, Treasury Department official Kenneth Feinberg will push to renegotiate contracts that he views as excessive or seek other ways to reduce overall outlays, according to those familiar with the matter.
The role of the government in setting pay is reaching a pivotal moment. Seven banks and industrial companies that received significant bailouts must submit proposals for their compensation packages by Aug. 13.: Citigroup Inc., Bank of America Corp., American International Group Inc., General Motors Co., Chrysler Corp., Chrysler Financial and GMAC Financial Services Inc.
Feinberg, who has authority to oversee pay for the 100 highest-paid employees at those companies, has been meeting regularly with the seven firms to help them fix a level and structure of compensation that the government deems proper, say industry and U.S. officials.
With public anger high over the rich pay packages awarded to some financial executives, Mr. Feinberg must walk a fine line between curbing pay at companies benefiting from taxpayer funds while not squeezing compensation so hard that it hurts the ability of companies to lure talent.
None of the firms have yet submitted their proposed pay packages. GMAC has proposed to Mr. Feinberg that it be able to pay its top people a mix of 20% cash and 80% stock, according to a person familiar with the situation.
Dealing with contracts is arguably among the trickiest issues facing Mr. Feinberg and the firms he oversees. Companies are legally allowed to enter into guaranteed pay arrangements. But there is little appetite among lawmakers for giving large payouts to employees at firms receiving taxpayer-funded bailouts. A furor erupted earlier this year after the Obama administration allowed AIG, which has received several government lifelines, to pay bonuses that the firm said it was contractually obligated to make.
Mr. Feinberg can't rip up legal contracts. But he is expected to push firms and employees to renegotiate payments he deems too high, said people familiar with the Treasury's plans. If that can't be done, they said, Mr. Feinberg is expected to factor the amount of a contract into an employee's overall pay and use that calculation to bring down total compensation. For instance, if an employee were legally guaranteed a $1 million bonus for 2009, Mr. Feinberg might subtract that amount from the employee's 2009 base salary, or cut the employee's future pay to compensate for that amount.
One of the first tests facing him Mr. Feinberg is what to do if Citigroup seeks to honor its profit-sharing contract with a top energy trader, Andrew J. Hall, that could pay out as much as $100 million for 2009. Mr. Hall, head of Citigroup's energy-trading unit, Phibro LLC, and Citi are in talks about a possible divestment of Phibro, as previously reported. If that deal happens, the question of Mr. Hall's pay might be moot.
It is unclear how Mr. Feinberg would rule on Mr. Hall's case. Citigroup hasn't yet submitted his or any other employee's compensation package for review. If Mr. Feinberg deems Mr. Hall's pay excessive, he would likely try to get Citigroup to lower the amount. If that isn't possible, Mr. Feinberg might apply that $100 million towards Mr. Hall's future earnings.
"Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk-taking and reward performance for their top executives," said Andrew Williams, a Treasury Department spokesman.
A Citigroup spokeswoman said: "Citi continues to examine ways to ensure its employee-compensation practices are competitive in this very challenging market environment."
A spokesman for GM said the company "has every intention of complying" with the government's executive-pay guidelines. A GMAC spokeswoman said, "Attracting and retaining key talent is critical toward continuing our efforts to transform the company and restore profitability."
A spokeswoman for Chrysler Financial said, "We continue to work with Special Master, Kenneth R. Feinberg, on corporate executive compensation, to seek advice and input with regard to our compensation plans."
A GMAC spokeswoman said, "Attracting and retaining key talent is critical toward continuing our efforts to transform the company and restore profitability."
A representatives of Bank of America had no comment. A Chrysler spokesman wasn't able to provide immediate comment.