The Obama administration stepped up efforts on Thursday to push for measures to tie executive pay at all publicly traded companies more closely to performance, but faced some skepticism from lawmakers.
On Wednesday, the Treasury Department said that seven companies receiving government bailout money will be subject to strict oversight on pay for their top executives and other highly paid employees. Treasury also said it wants new laws to empower the U.S. Securities and Exchange Commission to ensure that shareholders have more say in setting pay.
While the financial sector has been at the center of this issue, we believe that compensation practices must be better aligned with long-term value and prudent risk management at all firms, Treasury Counselor Gene Sperling told the House of Representatives Committee on Financial Services.
Both President Barack Obama and Treasury Secretary Timothy Geithner have said that Wall Street compensation practices encouraged excessive risk-taking, sowing the seeds of the financial crisis that has driven the United States and many other countries around the globe into recession.
Lawmakers from both major parties expressed uneasiness at the prospect of what they considered growing interference by government in business affairs. They suggested that regulatory reform and a determination to let companies stand or fail on their own would be preferable to putting taxpayer money into struggling companies.
Executive compensation limits to address systemic risk are the wrong remedy for what is probably a nonexistent problem, said Representative Jeb Hensarling, a Republican from Texas.
APPROACH IN QUESTION - NOT THE EFFORT
But the committee's influential chairman, Representative Barney Frank of Massachusetts, took a different tack, saying he was not concerned about letting the government have a role in policing pay levels, though he doubted whether some proposed measures would work.
Frank did not indicate whether he would oppose passage of the two new laws that Treasury wants -- one to give the SEC authority to require companies to allow non-binding shareholder votes on pay packages for top executives and another to ensure that internal pay committees that set pay levels and perks for company leaders are more independent from management.
A second Democrat, Representative Brad Sherman from California, said the administration's proposals did not go far enough, particularly the say-on-pay vote. I believe we ought to look at that being binding, not just advisory, he said.
As he opened his testimony, Treasury's Sperling said the government wasn't aiming to micro-manage pay practices nor to put caps on pay for executives. But he repeated that the current financial crisis was partly fueled by compensation practices that encouraged top executives to pursue risky strategies in hope of reaping big bonuses and incentive payments.
The committee heard from two panels, one of them made up of pay experts who warned there can be unintended consequences from efforts to curb pay that can make the situation worse.
SCRAMBLING TO PLUG HOLES IN THE PAY DIKE
A law professor at George Mason University, J.W. Verret, cited 1993 tax code changes that were intended to curb the disparity between pay for executives and wages for ordinary workers by limiting the deductibility of nonperformance-based compensation.
The result was that executive compensation increased exponentially and the disparity immediately widened, he said.
Similarly, the chairman of the University of Southern California's Marshall School of Business, Kevin Murphy, said trying to design regulations to curb pay was like trying to fix holes in a dike.
The only certainty with pay regulation is that new leaks will emerge in unsuspected places, and that the consequences will be both unintended and costly, Murphy said.
A Federal Reserve official warned that putting too tight a rein on pay could make it harder for U.S. companies to attract the best talent.
Regulation that is too severe and that does not recognize that the market for quality employees is global will threaten more harm than it will do good, said Scott Alvarez, the Fed's general counsel.
On Wednesday, the White House named Kenneth Feinberg, the lawyer who oversaw the government's compensation fund for victims of the September 11, 2001, attacks, as its pay czar to police compensation of top earners at companies receiving exceptional government aid.
There are currently seven companies that will fall under Feinberg's oversight: General Motors, Citigroup, Bank of America, Chrysler, AIG, GMAC and Chrysler Financial. Feinberg will have wide-ranging authority to set pay for their top executives and other top earners as long as they are getting taxpayer-funded bailouts.
(Reporting by Karey Wutkowski and Glenn Somerville; Additional reporting by Mark Felsenthal; Editing by Jan Paschal)