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The Obama administration outlined some broad principles today for reforming the way corporate executives are paid. Treasury Secretary Timothy Geithner cautioned that putting those principles into practice will not be easy. Up to now, the administration has focused mostly on executive pay in banking and insurance, but these new principles would cover businesses across the spectrum.
NPR's Scott Horsley has our story.
SCOTT HORSLEY: Americans were furious this spring when they learned that executives of the insurance giant AIG had received multimillion-dollar bonuses for 2008, the year they brought their company to the brink of bankruptcy and forced a massive taxpayer bailout. AIG became exhibit A of the jackpot-driven pay scales that had become common in the financial industry - pay scales that Securities and Exchange Commission Chairwoman Mary Shapiro says weakened the whole system.
BLOCK: Incentive structures that rewarded short-term risk taking without really taking into account the long-term impacts on the company are clearly widely believed to have really contributed to the economic crisis.
HORSLEY: For months now, the Obama administration has been promising to reform the way executives are paid, rewarding those who create long-term value, not just a temporary jump in the stock price. As part of that effort, Treasury Secretary Timothy Geithner says the administration is backing legislation that would give shareholders a nonbinding vote on executive pay and ensure that corporate directors who set that pay aren't beholden to executives.
BLOCK: We are going to support giving the SEC legislative authority for say-on-pay legislation and to make sure that compensation committees are fully independent.
HORSLEY: The secretary also spelled out some broad guidelines about how executives should be paid. Compensation should be transparent, for example, and include a consideration of risk. But today, Geithner admitted that's easier said than done and he took pains to say what the government is not doing.
BLOCK: We are not proposing ongoing government role in setting policy on compensation. We do not believe it's appropriate for the government to set caps on compensation. We are not going to prescribe detailed prescriptive rules for compensation. We think all those things would be ineffective - could be counterproductive in some ways, and we're going to try to find the right balance.
HORSLEY: For companies that receive government bailouts the government will play a more hands-on role in setting pay. That's one reason some big banks have been eager to return the bailout money as soon as possible. Banking lobbyist Scott Talbott, of the Financial Services Roundtable, worries if the government sets pay scales that are too low, the affected banks could find themselves at a competitive disadvantage.
BLOCK: What we'd like to see is the Treasury Department recognize that one size doesn't fit all and to issue guidelines rather than specific dollar amounts.
HORSLEY: The Treasury Department is planning to use a special advisor, Ken Feinberg, to help referee pay cases in the companies that got federal bailouts. Feinberg has experience in mediating delicate financial issues. He previously helped to decide cash settlements to victims of the September 11th attacks. The new post will give Feinberg unusual authority over the income of hundreds of private sector employees. But White House spokesman Robert Gibbs says that kind of federal oversight is justified under the circumstances.
BLOCK: These are private sector employees that in many ways have their job based on the extraordinary assistance that has been provided by taxpayers to ensure that they can continue to have their jobs.
HORSLEY: The administration's moves on compensation are just the beginning of a broader overhaul of financial regulations. Tomorrow, a House committee will consider the connection between the way bankers are paid and the risks they're willing to take - risks that could wind up hurting the paychecks of every American.
Scott Horsley, NPR News, Washington.
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