Washington Puts The Squeeze On Executive Pay

The Obama administration is poised to limit sky-high pay for executives of some of the largest financial service companies that received a government bailout. And the Federal Reserve detailed its own plan Thursday to rein in pay packages that may threaten the health of banks it supervises.

On Thursday, President Obama said Americans believe in success. "But it does offend our values when executives of big financial firms — firms that are struggling — pay themselves huge bonuses, even as they continue to rely on taxpayer assistance to stay afloat," he said.

Meanwhile, Congress is weighing legislation that would give shareholders more power over limiting executive pay at public companies.

Here, a look at some of the issues that have spurred the administration to take separate action.

Why has the Obama administration decided to establish its own rules for executive compensation?

Last year's $700 billion bailout package wasn't an easy pill for the public to swallow. And now that some of the firms that received and repaid bailout funds have returned to profitability, they're handing out large compensation and bonus packages.

"Part of what is forcing the government to think about doing something about pay is public outrage," says Paul Hodgson, senior research associate for The Corporate Library.

"There is a fairly widely held opinion that part of what caused the financial crisis was the perverse incentives that were in place at the banks."

Hodgson says this is driving both the administration and Congress to limit pay — especially for the companies where the government has made the largest investment.

What companies are likely to be affected by the administration's plan?

The seven companies that received the largest government bailouts are being asked to slash compensation for top executives: American International Group Inc., Bank of America Corp., Citigroup, Chrysler and its financial arm Chrysler Financial, as well as General Motors and its financing arm GMAC. The government owns close to 80 percent of AIG and more than 30 percent of Citigroup.

What steps does the administration plan to take to limit executive pay?

Kenneth Feinberg, the Treasury Department's official in charge of executive compensation for companies that received funds as part of the Troubled Asset Relief Program, or TARP, announced details of the administration's plan Thursday.

Feinberg told reporters that the average total compensation for the top 25 executives at each firm would be cut by more than 50 percent. The plan, however, will restrict the pay of just 175 executives at the seven firms. There still will be executives who will receive millions in compensation.

What will the consequences be for companies if they don't abide by this order?

The companies could immediately pay back the money they've borrowed from the government, but that would put many of them out of business. Some executives could leave the companies in search of higher pay elsewhere. That's a concern voiced by some critics who say it's in the interest of taxpayers for these companies to retain these executives in order to be able to return to profitability and ultimately repay the government.

Other financial services companies that have paid back bailout money, including Goldman Sachs and JPMorgan Chase, won't be restricted by Feinberg's rules. These companies are making big profits again and plan to hand out sizable bonuses to their executives. The companies may turn more conservative in light of the public outcry over this issue, but it won't be a requirement.

Will the cuts in cash payouts be replaced by anything else?

The pay cuts are likely to be replaced by restricted stock rewards. Hodgson says executives will likely have to hold the stock for several years before selling. The idea is to create incentives for executives to make the companies profitable in the long term.

How does the Fed plan to review compensation?

On Thursday, Fed Chairman Ben Bernanke said that the Fed will examine pay systems in place for executives and employees at all of the banks that fall under their supervision — including 28 large banks and additional regional and community banks — to ensure that they're not engaged in "excessive risk-taking."

How is the legislation that Congress is considering different from the administration's plan?

Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, sponsored the so-called say-on-pay legislation, which the House passed in July. The bill is intended to give shareholders more influence over approving pay and compensation packages at the companies they invest in.

"There are problems in pay elsewhere, outside the financial services companies," Hodgson says. "This [the bill] gives shareholders the right to voice their disapproval."

The administration's plan focuses on imposing limitations on executives at the seven companies where the government remains a major shareholder.

Why are the Obama administration, Congress and the Fed all taking up this issue?

"I think it's inevitable that all the parties want their oar in the water," says Peter Cappelli, a professor of management at the Wharton School at the University of Pennsylvania.

Cappelli says that boards of directors and the executive compensation committees for companies — especially those in the investment world — have been "politically tone deaf." He adds: "They just don't understand the way the rest of the world is looking at this."

The Associated Press contributed to this report.

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