Last week’s decision by the Obama administration to cut and limit the pay of executives at bailed out companies is generating a lot of press, but it’s the moves by Congress that would give investors a “say on pay” that will have the broader sweep on Wall Street.
Pay cuts by the administration’s “pay czar” Ken Feinberg, affect the top-paid executives at the companies that received the most money under the Troubled Asset Relief Program (TARP), but with a relatively narrow scope: 175 salaries were slashed among seven companies.
Still, the widespread news of the cuts – which on average reduced total compensation by 50% – was met with glee from American taxpayers, which funded the bailouts of the firms. A survey conducted by ABC News and The Washington Post showed the majority of Americans in all political parties supported the measure: 79% of Democrats, 70% of Independents and 62% of Republicans.
Now, with the public behind it, Congress will likely ride the wave of momentum to pass legislation that will give shareholders more of a voice on executive pay.
And it’s already halfway there: the House of Representatives in July passed the Corporate and Financial Institution Compensation Fairness Act, which gives investors a nonbinding annual advisory vote on executive compensation and federal regulators the power to stop any “perverse” incentives that may threaten the stabilities of the companies or the economy.
Shortly before the House passed its so-called say-on-pay bill, it was revealed that thousands of employees at TARP recipients received bonuses of $1 million each.
“What we’ve seen on Wall Street in the last many years is turning that concept of pay for performance on its head,” U.S. Rep Chris Van Hollen, D-MD told The New York Times after the House passed the bill.
A similar bill dubbed the Shareholders Bill of Rights Act was introduced earlier this year by U.S. Sen. Charles Schumer, D-NY. However, unlike the House bill, the Senate bill would require a split in the jobs of chairman and chief executive officer, as well as require the chairman to be an independent director.
In a letter to pay czar Feinberg last week, Schumer urged him to also revamp the TARP firms’ corporate governance across the board.
“These companies are the poster children for the total breakdown in corporate governance and lack of effective board oversight that contributed to the recent crisis,” wrote Schumer. “I believe these reforms are critical if the government is serious about turning these companies around, returning them to private sector ownership and ensuring they participate in the markets as responsible corporate citizens.”
Feinberg cut executive pay at companies that received the most in federal money: Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), American International Group Inc. (NYSE: AIG), General Motors Corp. (NYSE: GRM), Chrysler Group LLC, as well as the financing arms of the two automakers, GMAC LLC (NYSE: GMA) and Chrysler Financial.
The Case for Companies
There’s concern that the recent pay cuts, as well as the passing of any legislation that gives investors a say on pay will result in a talent exodus to companies that won’t be bound to the regulations, such as privately held companies.
"This is genuinely a talent business," said Howard Berg, president of Jackson Consulting Group in an interview with Forbes. "To my mind there's no difference between [former Citi energy trader Andrew Hall, who was owed $100 million] and Travolta, A-Rod and Tiger Woods. They should be paid for their talent."
Before Feinberg cut the pay packages of 25 of the most highly compensated executives at each of the seven firms, many were already driven away by the uncertainty of working for companies under Capitol Hill’s microscope.
At Bank of America, only 14 of the 25 highly paid executives were left by the time Feinberg’s decision was made. Only 13 of the 25 at AIG remained.
“There's no question people have left because of uncertainty of our ability to pay,” an executive at one of the affected firms told The Washington Post. “It's a highly competitive market out there.”
If the amount of executives who fled before Feinberg’s decision is a sign of things to come once Congress likely passes say-on-pay legislation, the ripple effect could go well beyond the financial sector.
Any legislation regulating executive pay is being met with sharp opposition from most Republicans as well as the U.S. Chamber of Commerce, the nation’s biggest business lobby.
“This legislation would create a command-and-control regulatory scheme,” said Tom Quaadman, executive director at the Chamber’s Center for Capital Markets Competitiveness. “Employee compensation should be a decision made by appropriate levels of management or the board of directors and based on a variety of factors, including merit and promotion.”
GOP lawmakers blasted the House’s bill that was passed last summer, saying it’s not up to Congress to tell corporations what they can do.
“There is no question that there have been some questionable decisions made by some of our major corporations regarding executive pay,” said U.S. Sen. Spencer Bachus, R-AL. “However, I strongly believe that it is neither the executive branch nor Congress’s role to mandate compensation policies, or the role of this Congress or the executive branch to say who sits on a corporate board of directors or interfere with governance in any way.”
A Proactive Stance
While shareholders of many companies are proposing their own say-on-pay policies, some companies aren’t waiting for Washington and have already instituted them.
Aflac Inc. (NYSE: AFL) was the first public company to adopt a say-on-pay policy in 2007 and believes such a measure helps it better gauge how it compensates executives. Shareholders resoundingly approved the idea, with a 93% vote in favor of it.
“Our shareholders, as owners of the company, have the right to know how executive compensation works,” Chief Executive Officer Daniel Amos said then. “An advisory vote on our compensation report is a helpful avenue for our shareholders to provide feedback on our pay-for-performance compensation philosophy and pay package.”
Since then, say on pay has become increasingly en vogue. The bulk of the companies come from the technology sector, with companies like Intel Corp. (Nasdaq: INTC), Apple Inc. (Nasdaq: AAPL) and Microsoft Corp. (Nasdaq: MSFT) all giving shareholders advisory votes on executive compensation.
Still, there are plenty of non-financial companies out there that aren’t receptive to the idea.
Comcast Corp. (Nasdaq: CMSA) Chief Executive Officer Brian Roberts said executive pay has long been the responsibility of a company's board of directors and a shareholder vote on compensation raises " ."
News and Related Story Links:
- The Washington Post:
Americans: Restrict Their Pay
Corporate and Financial Institution Compensation Fairness Act of 2009
- The New York Times:
House Approves Limits on Executive Pay
- Senator Charles Schumer:
Schumer To Pay Czar: Fix Corporate Governance, Not Just Bonuses, At Rescued Companies
- The Wall Street Journal:
Citi in $100 Million Pay Clash
- The Washington Post:
Top Employees Leave Financial Firms Ahead of Pay Cuts
- The New York Times:
House Panel Clashes Over Pay Restrictions
- ABC News: