"May I respond sir?"
Treasury Secretary Timothy Geithner announced Wednesday that the administration plans to seek legislation that would try to rein in compensation at publicly traded companies through nonbinding shareholder votes and less management influence on pay decisions.
To Rep. Barney Frank, the chairman of the House Financial Services Committee, Geithner's plan doesn't go far enough.
"It is not the government's business to discourage risk taking," said Frank, D-Mass. "But neither should we allow systems which have existed up until now whereby decision-makers are handsomely rewarded if they take big risks that pay off, but suffer no penalty whatsoever if those risks result in losses to the company."
On Thursday, officials from the Treasury Department, the Federal Reserve and the Securities and Exchange Commission planned to testify on the issue before Frank's committee.
That Frank would so quickly call for proposals beyond those laid out by Geithner illustrates the caution with which the Obama administration is approaching the fundamental issue of compensation packages. But it also underscores the shifting ground beneath the private sector in the midst of a financial crisis.
The administration drew a sharp line between the overall corporate world and those institutions that have tapped the government's $700 billion Troubled Asset Relief Program.
It issued new regulations Wednesday that set pay limits on companies that receive TARP assistance, with the toughest restrictions aimed at seven recipients of "exceptional assistance." Those firms are Citigroup Inc., Bank of America Corp., General Motors Corp., Chrysler LLC, American International Group Inc., GMAC LLC and Chrysler Financial.
The regulations limit top executives of companies that receive TARP funds to bonuses of no more than one-third of their annual salaries.
In a significant expansion of authority, the regulations call for a special compensation overseer who will burrow into the pay practices of some of the country's biggest enterprises.
The administration named Kenneth Feinberg, a lawyer who oversaw payments to families of victims of the Sept. 11, 2001, terrorist attacks, as a "special master" with power to reject pay plans he deems excessive at the seven companies with the biggest injections of public money. Feinberg also would have authority to review compensation for the top 100 salaried employees at those firms.
"We do not believe it's appropriate for the government to set caps in compensation," Geithner said. "We're not going to prescribe detailed prescriptive rules for compensation. All those things would be ineffective, could be counterproductive in some ways."
Geithner said the administration will ask Congress to give shareholders a nonbinding voice on executive pay and to require corporate compensation committees to be independent from company management. That second provision would give the SEC authority to strengthen the independence of panels that set executive pay.
Geithner also laid out a series of guidelines that encourage corporate boards to adopt pay packages that reward long-term performance rather than short-term gains and to better manage the relationship between risk and incentive. Those guidelines, or principles, are not enforceable but are meant as a message to corporate boards and to shareholders.
Frank said he didn't think strengthening the independence of compensation committees would do enough. Noting the "inherently close relationship" between top executives and boards of directors, "it is very unlikely that you will ever get the degree of independence that will allow the boards of directors to be left completely on their own to set compensation," Frank said.
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