Pay czar, Federal Reserve move forward on compensation plans

Associated Press • Nov 2, 2009 at 12:00 AM

WASHINGTON — The government’s “pay czar” expects compensation plans for additional employees at the seven companies getting the biggest bailouts to be in place by year’s end, while the Federal Reserve will soon start its own work on banks’ pay practices.

Kenneth Feinberg, the Treasury Department official overseeing compensation at the seven bailed-out companies, said Monday that he hopes “to come up with consensual plans” for highly paid employees beyond the top 25 at each firm.

Feinberg already has announced plans to slash pay for the top 25 executives at the seven companies: Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors Co., GMAC, Chrysler and Chrysler Financial. Now he is working on designing compensation structures for 75 additional employees at each one, ranking 26 through 100.

For those executives, Feinberg intends to set up a general plan within six weeks to govern their 2009 pay, he said in a speech at a conference on executive pay organized by the University of Maryland’s Robert H. Smith School of Business.

Then comes the next goal: A program for 2010 compensation packages for the top 25 executives at the seven companies, hopefully within the first quarter of the year, Feinberg said.

The Federal Reserve, meanwhile, will soon begin work to get a broad picture of U.S. banks’ pay practices, part of a larger effort to crack down on plans that encourage irresponsible risk-taking by employees, a Fed official told the conference.

Fed Governor Daniel Tarullo, the central bank’s point man on the issue, said the Fed plans to “commence shortly” a so-called “horizontal” review to compare and contrast information across the nation’s biggest banks. Supervisors at the Fed’s regional banks, staff at the Fed’s headquarters in Washington and other financial regulators will take part in the review.

Fed officials previously have said they don’t anticipate making the results of such a review public, unlike “stress” tests conducted earlier this year to determine how big banks would fare if the economy were to take a turn for the worse.

Tarullo’s remarks came as the Fed supervisors met Monday with executives of the top 28 U.S. banks to discuss the Fed’s compensation initiative.

“In discussions across the country, we are communicating our plans and expectations to these firms, with particular attention to beginning this information gathering,” Tarullo said.

The goal is to ensure that banks integrate their pay practices “completely” into their schemes for managing risk, he said in response to a question. The Fed’s work eventually will be coordinated with other federal bank regulators.

Under the Fed plan, the 28 biggest banks — including Citigroup, Bank of America and Wells Fargo & Co. — will develop their own plans to make sure compensation doesn’t spur undue risk taking. If the Fed approves, the plan would be adopted and bank supervisors would monitor compliance.

At smaller banks — where compensation is typically smaller — Fed supervisors will conduct reviews. Those banks don’t have to submit plans.

The Fed’s goal is to make sure compensation policies for executives, traders, loan officers and other employees don’t spur reckless gambles that could endanger the bank and the broader financial system.

Feinberg reaffirmed in his speech that he was reluctant to use the authority he has to “claw back” compensation at any company that received money from the $700 billion bailout program and still hasn’t paid it back.

Use of the power to take back compensation should be very narrow and limited to “egregious cases” of executive benefits, he said. Clawbacks aren’t planned to be part of the current discussions with the companies on the 75 additional employees, he told reporters after his speech.

Feinberg also said he was surprised that his directives for cutting pay at the seven companies, which take effect this month, were “fairly well received for what they are designed to accomplish.”

Under the plan, the seven companies must cut their top executives’ average total compensation — salary and bonuses — in half. Cash salaries for the top 25 highest-paid executives will be limited in most cases to $500,000 and, in most cases, perks will be capped at $25,000.

At issue is Wall Street’s longtime pay system that rewards those who make the sort of high-risk bets that triggered the worst financial crisis since the Great Depression. Only a year after the financial crisis peaked, the biggest banks are already making billions of dollars again placing risky bets with help from cheap government loans and other federal subsidies.

If those bets were to go bad, the loss to taxpayers could be immense. That’s led some critics to call on the government to ban big commercial banks from trading risky securities — or shrink them so their collapse wouldn’t jeopardize the economy.

The Obama administration has resisted such calls, opting instead to seek the authority to take over and wind down large banks that get into serious trouble.

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