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Obama Pay Czar Slashes Compensation for Bailed Out Firms

The top earners at the top firms bailed out by the U.S. government during the financial crisis will have their pay and bonuses drastically cut. Deborah Soloman and Dan Fitzpatrick for WSJ:

The U.S. pay czar will cut in half the average compensation for 175 employees at firms receiving large sums of government aid, with the vast majority of salaries coming in under $500,000, according to people familiar with the government’s plans. As expected, the biggest cut will be to salaries, which will drop by 90% on average. Kenneth Feinberg, the Treasury Department’s special master for compensation, also intends to demand a host of corporate governance changes at those firms.

Mr. Feinberg’s ruling, expected in coming days, will provide fodder for the long-running debate about whether the Obama administration is being overly tough or overly lenient on Wall Street. An executive at one of the seven companies under Mr. Feinberg’s authority said the terms came as a shock, especially because they changed so suddenly. The compensation restrictions “were clearly much worse than what had been anticipated.”

The largest single compensation package will be less than $10 million and is destined for a Bank of America Corp. employee, according to people familiar with the matter. That is much less than Wall Street’s standard payouts for star employees. Yet some executives will still walk away with large paychecks. And some big salary cuts might skew overall numbers. Outgoing Bank of America Chief Executive Ken Lewis will receive no salary for 2009. Already, Citigroup Inc. is telling employees the net impact of Mr. Feinberg’s rulings will be minimal because the cut salary will be shifted from cash to longer-term stock grants, said people familiar with the matter.

The Obama administration gave Mr. Feinberg the job of more closely tying compensation to long-term performance, something the White House believes will help prevent employees from taking unnecessary risks for short-term gains. The administration believes skewed compensation incentives were one cause of the financial crisis.

Stephen Labaton of NYT frames it this way:

Responding to the furor over executive pay at companies bailed out with taxpayer money, the Obama administration will order the firms that received the most aid to slash compensation to their highest-paid employees, an official involved in the decision said on Wednesday.

The plan, for the 25 top earners at seven companies that received exceptional help, will on average cut total compensation this year by about 50 percent. The companies are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the financing arms of the two automakers. Some executives, like the top traders at A.I.G., will face tight limits on their pay. In addition, the top-paid employees at all the affected companies will face new limits on their perks. The plan will also change the form of the pay to align the personal interests of the executives with the longer-term financial health of the companies. For instance, the cash portion of the executives’ salaries will be slashed on average by 90 percent, and the rest will be replaced by stock that cannot be sold for years.

But while the plan would pare compensation substantially from what the highest-paid people at the companies might have received under normal circumstances, it would still permit multimillion-dollar pay packages.

In addition, it would have no direct impact on firms that did not receive government bailouts or that have already repaid loans they received from Washington. Therefore, it is unclear how much effect, if any, the plan will have on the broader issues relating to executive compensation, income inequality and the populist animosity toward Wall Street and corporate America.

There’s the question of the fairness of setting the conditions of the bailout long after the loans were agreed to.  For that matter, there’s an equity issue in that some or most of the people whose salaries are affected may not have even been working for the firms at the time of their collapse.  But, hey, these companies took billions in taxpayer money, so they should just suck it up, right?

And, hey, the American people support this.

In the Post-ABC poll, support for federal limits on the salaries and other compensation of top executives at companies receiving emergency federal loans in the past year spans party lines. Nearly eight in 10 Democrats back the idea (79 percent support, 68 percent “strongly), as do seven in 10 independents (56 percent strongly) and more than six in 10 Republicans (62 percent support, 49 percent strongly).

pay-restrictions-poll

If even Republicans want to screw these guys over, what’s the harm?

Well, business law professor Steve Bainbridge says we should be outraged.

The Obama administration has shown a shocking disregard for the rule of law when contract rights interfere with the administration’s ability to reorder the American economy as it sees fit.

[...]

So set aside the question of whether compensation at financial firms is “too high,” however you propose to measure it. Set aside the question of whether these troubled firms will be able to keep their best people, who presumably now will be targeted by unregulated firms like hedge funds that will be free to pay market rates.
The basic problem is here is that many (most?) of the compensation deals the Obama administration is shredding were set in employment contracts. Granted, some of those employment contracts were signed after the law setting up pay “czar” Kenneth Feinberg’s position and empowering him to review pay packages at TARP firms. But a lot of them are pre-existing contracts and it’s those contracts that are the main concern.

Feinberg in fact is trumpeting his success at forcing so-called renegotiation “even for contracts over which he did not have explicit authority.”

The bottom line thus is that Obama is having his minion coerce TARP executives and employees into ripping up contracts Obama doesn’t like so as to assuage the populist public. In doing so, Obama and his appropriately entitled “czar” are exhibiting a basic lack of respect for the rule of law.

Unfortunately, these are not isolated incidents. As I wrote back in May, they are each “of a piece with the totality of Obama’s program.”

Further, economist Alex Tabarrok questions the practicality.

There is no way this will work as advertised.  If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere.  Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut.  Chaos will be created at these firms as top people leave in droves.  Will the administration then order people back to work?

But, so what, right?  It would serve these companies right, wouldn’t it, to lose their best people?  I mean, aside from the fact that they owe the taxpayers tens of billions of dollars and the same leaders who are pushing this policy deemed them “too big to fail” just months ago?

Well, Yves Smith thinks this is just a “feel good” measure that will do very little.

Pay cuts falls well short of the oversight the government should be exercising (any private owner with that big of a stake would have thrown out the board and installed new management, for starters, and be all over AIG like a cheap suit). So this is an overdue, token measure to appease the public over the AIG retention bonuses that were also extended to clearly non-essential support staff, which is a clear tipoff that they were also extended to non-essential management.

Four of the companies are auto bailout related, so we can exclude them as far as implications for big financial firms are concerned.

Citigroup is an obvious ward of the state too, and the AIG argument applies there. The government should have more control there too, which does NOT mean micromanagement. When the Swedish nationalized their banks, they replaced management and set strict goals and targets, but did not interfere in operations. Bank of America may look like a borderline case, but it would be dead now had it not gotten emergency infusions. Given its credit card losses, Merrill, and Countrywide (for starters) combined with the sudden exit of Ken Lewis, it may well be in worse shape than is now perceived.

The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.

If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don’t like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments.

Yeah, but meaningful reform is hard and hanging a few scalps on the wall is easy and makes us feel good. But, really, as James Pethokoukis points out, our wrath here is misdirected:

If I made of list of factors contributing to the recession and financial crisis, Wall Street pay would come in around 6th, after 1) easy monetary policy; 2) TBTF; 3) US housing policy; 4) global savings glut/China labor shock; 5) Wall Street group think. Yet pay is where so much energy is being directed at this issue thanks to its populist appeal. America hates TARP so Washington needs to make amends by hammering execs at TARP recipients.

But most of those things involve government or are totally out of the hands of greedy business executives.  And it’s the latter we really want to punish.  So don’t bother me with facts.

UPDATE (October 23):  We’ve moved from the theoretical to the real in less than 24 hours: See Top Employees Flee Pay-Limited Firms.

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About James Joyner
James Joyner is the publisher of Outside the Beltway, an associate professor of security studies at the Marine Corps Command and Staff College, and a nonresident senior fellow at the Atlantic Council. He's a former Army officer and Desert Storm vet. He has a PhD in political science from The University of Alabama. Views expressed here are his own. Follow James on Twitter.

Comments

  1. odograph says:

    I think we need to back up and think about that moment in 2008 when so many firms went functionally bankrupt.

    Arch-conservatives at the time said “let them fail” while arch-liberals said “nationalize them.” There wasn’t a lot of overlap in those positions. It was barbell politics again.

    What we got, with the Fed shoving cash down their throat, without taking control, was not exactly a compromise. Well, not a compromise in philosophy, it was just a path which was politically possible.

    Now a year or two later we see the downsides of the “shove cash” plan. The compensation problem has come up because banks (and similar) look at their Fed-inflated balance sheets and say “profits!” and “where’s my bonus!”

    If you don’t understand this, and see this as deeply broken, you can’t really talk about the “compensation problem”

    … and you certainty can’t talk about “fairness.”

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  2. odograph says:

    BTW, I’m going to say that in retrospect we should have let firms fail, and then if they were too big, nationalize them and unwind them as they entered bankruptcy.

    That would have been the real compromise, and it would not have left these stupid compensation questions hanging.

    No, if your company bankrupts, you don’t get ten million dollars. That’s capitalism.

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  3. PD Shaw says:

    The real outrage here is that Congress is not pursuing real financial regulatory reform because, I’ll paraphrase Elizabeth Warren on today’s This Morning Joe, there is no oxygen for it in the public debate. The public doesn’t like other people having high salaries, so it’s bread and circuses time for the rubes.

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  4. Mark says:

    1. This is bad policy that people love. I don’t like it, but I’m pretty sure our economic order will survive.
    2. I’m sure Mr. Bainbridge is similarily outraged when public employee union members (or in this exact case, union members at GM and Chrysler!) are asked to give back pay raises and benefits they’ve bargained for and are included in their contracts.

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  5. DL says:

    Since the idea is that somehow the execs don’t warrant the $$$ out of taxpayer’s money (though I wonder what the critieria is -other than the fact that they are capitalists) which reason says, therefore; neither do the leaders and politicians in Washington that have literally presided (Obama was often “present”) over and caused this situation deserve their salaries. I propose a 90$ cut in all Politician’s salaries and perks -staffs (Rahm, David, included) likewise.
    This should be the battle cry of the right -but as we know, there is “the right” and there is the Washington establishment right.”

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  6. odograph says:

    An over-focus on contracts is stupid.

    Or it is a tactic, as in “let me find the ‘one idea’ compatible with my pulpit”

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  7. odograph says:

    DL, I think you’ve captured the stupid, illogical, and probably childish Republican argument when you say:

    “Since the idea is that somehow the execs don’t warrant the $$$ out of taxpayer’s money”

    No, that is not the argument. That is a play-argument. It says “here I am pretending that the government is now Socialist, and Socialists should get what they deserve.”

    We did not get Socialism. We did not nationalize those companies. We just in Crony-Capitalism, hosed them down with money when they cried for help. This was the classic “private profit, socialized losses.”

    I guess the thumbnail is, don’t confuse crony-capitalism with socialism. You’ll loose your perspective and your ability to deal the problem as it really is.

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  8. odograph says:

    (Maybe you are defending crony-capitalism because it is at least capitalism? If so you do yourself a disservice.)

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  9. Zelsdorf Ragshaft III says:

    That certainly the power the founder thought the government should have. being able to force publicly held corporations to take tax money from the government then dictate how much their executives could be paid. These enterprizes pay high dollars to attract the talent necessary to do the job. When those who have the salaries reduced to a level below that of lower level employees, they will leave those jobs. Who will those proposed salaries attract? Pay peanuts, monkeys. This is not the job the American government was designed or authorized to do.

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  10. Herb says:

    This argument:

    “most of these executives will quit and get higher paying jobs elsewhere.”

    seems like a non-starter.

    The “elsewhere” company who would give these guys “higher paying jobs” would either have to be A) insane or B) stupid.

    With that said, it’s head-twistingly sad, predictable and annoying how conservatives are the first to defend shoveling tax dollars to the corporate executives of failed (but entrenched) companies, and the first to complain about it being used to feed a child or to plant a tree.

    Perspective, people. Buying milk and diapers for poor people is appeasing the moochers, but limiting pay for executives at bailed out companies is some kind of massive breach of principles? They’re still gonna make 4 times the median wage. So we’re talking…Limo to Jaguar. We’re talking a full household staff to just a nanny. They can still keep their country club memberships. They can still keep the compound interest on the millions they have sitting in the bank from the good years.

    They just can’t keep our taxpayer money. That’s all. Woe is them.

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  11. Alex Knapp says:

    I think that the “employment contracts” line is a red herring. For one, most people don’t have employment contracts. For two, most big corporations’ HR policies allow for pay cuts, cut bonuses, etc.

    Zelsdorf,

    By the way, most of our founding fathers didn’t want corporations at all…

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  12. James Joyner says:

    With that said, it’s head-twistingly sad, predictable and annoying how conservatives are the first to defend shoveling tax dollars to the corporate executives of failed (but entrenched) companies, and the first to complain about it being used to feed a child or to plant a tree.

    I opposed the bailouts. I’m pretty sure Bainbridge did, too. I don’t recall Tabarrok’s position at the time, although his libertarian sensibilities would lead me to think he opposed them,too.

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  13. Obama to Slash Exec Pay at Bailout Firms…

    NYT: Responding to the growing furor over the paychecks of executives at companies that received billions of dollars in the government’s financial rescue, the Obama administration will order the companies that received the most aid to deeply slash the …

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  14. PD Shaw says:

    To my knowledge, executives do have compensation contracts, including golden parachute provisions. They are regulated under Sarbanes-Oxley signed by GWB in 2002, but I believe compensation restrictions were only prospective.

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  15. odograph says:

    To my knowledge, executives do have compensation contracts, including golden parachute provisions. They are regulated under Sarbanes-Oxley signed by GWB in 2002, but I believe compensation restrictions were only prospective.

    Sure, and one of the few things that supersedes those contracts is bankruptcy.

    We did these too-gentle soft-bankruptcies … perhaps with the hope that companies (and executives) would be chagrined and not keep paying out like winners.

    That didn’t work out too well, did it?

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  16. Our Paul says:

    The problem American Banks face is they do not have a spokesman who can logically present their case. The Brits, on the other hand, do not have such problems, to wit:

    …Lord Griffiths, vice-chairman of Goldman Sachs International and a former adviser to Margaret Thatcher, said banks should not be ashamed of rewarding their staff.

    Speaking to an audience at St Paul’s Cathedral in London about morality in the marketplace last night, Griffiths said the British public should “tolerate the inequality as a way to achieve greater prosperity for all”.

    … he said bankers’ bonuses should be seen as part of a longer-term investment in Britain’s economy. “I believe that we should be thinking about the medium-term common good, not the short-term common good … We should not, therefore, be ashamed of offering compensation in an internationally competitive market which ensures the bank businesses here and employs British people,” he said.

    Griffiths said that many banks would relocate abroad if the government cracked down on bonus culture. “If we said we’re not going to have as big bonuses or the same bonuses as last year, I think then you’d find that lots of City firms could easily hive off their operations to Switzerland or the far east,” he said.

    Goldman Sachs is currently on track to pay the biggest ever bonuses to its 31,700 employees after raking in profits at a rate of $35m (£21m) a day.

    Clearly, not a man who has reviewed the available psychological studies on motivation. A brief (gasp) 18 minutes session at TED Talks should clear your mind. Difference in intrinsic and extrinsic motivation, plus other stuff…

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  17. sam says:

    Maybe we should have just nationalized the SOBs. What do you think the percentage of the American people for would have been then?

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  18. Because you personally know that every single one of these people are SOBs, is that it? Or are we too busy making omelettes to worry about treating each of these individuals as a detested group to further the leader’s agenda?

    What time does the Two Minutes Hate begin?

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  19. sam says:

    Charles, get your irony meter checked, OK? (Maybe I should of thrown in something about jackboots).

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  20. sam says:

    BTW, did all you folks bemoaning the action miss this part:

    In addition, it would have no direct impact on firms that did not receive government bailouts or that have already repaid loans they received from Washington.

    That is, the firms affected have not paid you and me back for the money we coughed up to keep them afloat. Seems reasonable to say, “Look, guys, before you start spreading that wealth around, why don’t you use some of it to pay us back.”

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  21. An Interested Party says:

    All of this concern for these executives is really quite touching…perhaps one of you could set up a charity fund to help these horribly disadvantaged people…

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  22. Social comments and analytics for this post…

    This post was mentioned on Twitter by JamesOTB: Obama Pay Czar Slashes Compensation for Bailed Out Firms: The top earners at the top firms bailed out by the U.S. go… http://bit.ly/14i0es

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  23. Herb says:

    “I opposed the bailouts. I’m pretty sure Bainbridge did, too. I don’t recall Tabarrok’s position at the time, although his libertarian sensibilities would lead me to think he opposed them,too.”

    That’s great. I did too. To the point I was making, though, one’s feelings on the bailout is largely irrelevant.

    Writing about this “curbing executive pay” story, Bainbridge is worried about the implications of the Obama administration breaking employment contracts…but did these employees not violate the contracts by taking their companies to “bailout or bust” territory?? If the contracts provided for huge paychecks and bonuses even if your decisions and actions made the company insolvent, then I’m not going to shed a single tear if the government steps in to break that contract. That’s a stupid contract that should have never been offered in the first place.

    Tabarrok is worried about the brain drain, despite the fact that we’re not talking about the cream of the crop here. These aren’t “top performers.” These aren’t “the best and the brightest.” These guys had executive authority at their companies and look what they did with it. If they’re “draining” out to other firms, I feel bad for those other firms!

    And Pethokoukis, with your endorsement, is worried that we’re directing our wrath at the wrong people. We should be mad at the government for “contributing to the recession and financial crisis.” Check.

    A lot of people were/are, which is why half of us “voted the bums out” last November and the rest of us spent the summer talking about tea bags. There’s no shortage of anger.

    But again, that’s irrelevant to this executive pay issue. These executives aren’t being punished for causing the recession. They are just not being rewarded for their own poor performance.

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  24. James Joyner says:

    Tabarrok is worried about the brain drain, despite the fact that we’re not talking about the cream of the crop here. These aren’t “top performers.” These aren’t “the best and the brightest.” These guys had executive authority at their companies and look what they did with it. If they’re “draining” out to other firms, I feel bad for those other firms!

    [...]

    But again, that’s irrelevant to this executive pay issue. These executives aren’t being punished for causing the recession. They are just not being rewarded for their own poor performance.

    If we’re talking about the decision-makers that led these companies into a mess, maybe. (When the global financial sector collapses at once, I hold out the possibility that even good managers failed.) But lots of these people are quite likely from other companies brought in to fix the problems. Why punish them for the sins of others? And why would they put up with it?

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  25. sam says:

    If we’re talking about the decision-makers that led these companies into a mess, maybe…

    Well, when a firm goes into bankruptcy, everybody in the firm suffers in the reorg. These financial institutions, in effect, went into bankruptcy. In the companies I worked for, in bad times everyone up and down the line had to share in the misery.

    I restate my point: The ax is falling only on those companies that have not yet repaid us. When they do repay us, they can do whatever they wish. (And I would mightly object to what I heard that Bernacke has suggested–even those companies not bailed out might see exec pay capped.)

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  26. Herb says:

    “[L]ots of these people are quite likely from other companies brought in to fix the problems. Why punish them for the sins of others? And why would they put up with it?”

    This is no doubt true. But on the flip side, why reward them for a job not yet done? (What are we, the Nobel Committee handing out cash awards in the hope that AIG’s new stewards will right their ship? Results first, bonuses second.)

    Why punish the taxpayers for their predecessors’ misdeeds? Considering AIG’s recent track record, I’m pretty sure I’m a better judge of how to spend my money than they are. So I want it back.

    Besides…

    Regardless of who left, who stayed, who came on after, these individuals are working for corporations. Just because Joseph Cassano doesn’t work for AIG anymore doesn’t mean that AIG doesn’t owe the American taxpayer money.

    If they want to pay us back, fine. But paying themselves first is too much to ask for. And the answer is no.

    We agree the bail-outs were a bad idea. But if they’re going to happen (and they are happening), then I think they should have some teeth…lest we find ourselves repeating history the next time a “too big to fail” company has their hand out.

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  27. James Joyner says:

    If they want to pay us back, fine. But paying themselves first is too much to ask for. And the answer is no.

    Paying us back requires making a profit. Which usually requires hiring good people.

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  28. [...] Joyner | Friday, October 23, 2009 Remember that plan by Obama’s pay czar to radically limit executive pay at bailed out banks? And how some of us were predicting that they’d just go to companies whose pay was not [...]

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  29. Neo says:

    If it’s good enough for Wall Street, it should be good enough for Freddie Mac …

    The pay package given to Freddie Mac’s new chief financial officer should have sent a message from Washington to corporate America about how executive compensation standards must change. Instead, it did just the opposite.

    The government-controlled mortgage finance company is giving CFO Ross Kari compensation worth as much as $5.5 million. That includes an almost $2 million cash signing bonus and a generous salary that could top $2.3 million.

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