Ted Kaufman - United States Senator for Delaware

Feinberg Uncertain About Lasting Effects Of Pay Guidelines; Some See Focus on Risk

Source: Bureau of National Affairs

By Aaron Lorenzo

October 22, 2010

Former pay czar Kenneth Feinberg told members of the Congressional Oversight Panel Oct. 21 that only time would tell whether his efforts to establish less risky compensation plans for financial industry executives would succeed, but others who testified at the same hearing said they are already seeing changes.

Rose Marie Orens, senior partner at Compensation Advisory Partners LLC, and Ted White, strategic adviser for Knight Vinke Asset Management, said measures of risk were a growing factor in setting executive compensation. That is an encouraging development, said Sen. Ted KAUFMAN (D-Del.), the panel's new chairman. He said pay at some failed banks and credit rating agencies was driven by the amount of risk taken by executives, according to a study commissioned by Sen. Carl Levin (D-Mich.) (73 DER EE-20, 4/19/10), leaving little doubt that a compensation of culture that rewarded risky behavior upon success but failed to punish failure played a role in fostering the recent financial crisis.

“So it's very reassuring to me to hear that people in the compensation business are saying that there is going to be change in corporate America,” KAUFMAN told BNA after the hearing. “And that risk is more and more of a factor in terms of setting compensation. That's one positive sign.”

Regulatory Role Key Going Forward.

Feinberg said it was good to see bank regulatory agencies issuing guidelines on pay at covered financial firms akin to the structures he imposed on executive pay at select companies that received federal bailout funding under the Troubled Asset Relief Program, or TARP.

But he said vigorous enforcement by regulators at the Securities and Exchange Commission and Federal Reserve going forward would determine the effectiveness of pay principles he put in place as special master for TARP executive compensation, a position he held through last month.

Generally speaking, Feinberg established compensation packages that included limited cash salaries and were more heavily weighted with long-vesting stock options. His rulings on pay covered the 100 highest-compensated employees at firms that received exceptional TARP assistance, and he also reviewed pay practices at all TARP recipients and made recommendations on their compensation.

“The main elements of pay should be—without mentioning numbers—low guaranteed base cash salary, [and] the remaining compensation in stock in that company, which cannot be transferred except over a lengthy period of time,” Feinberg said.

He also called for better corporate governance of golden parachute retirement packages, assorted perks, and end-of-career severance payments and pension plans. In summarizing his final report as the special master of TARP compensation, Feinberg said executive pay practices would remain a continuing concern for the Treasury Department, other government officials, and the public at large, especially at firms that received taxpayer assistance.

Light Touch Recommended.

Feinberg cautioned that circumstances around compensation vary among companies, so fixed rules are less advisable than broad principles.

Other witnesses agreed that a one-size-fits-all approach would not work. Fred Tung, law professor at Boston University, advocated a light government touch. He also suggested that making company debt a share of an executive's pay package could curb risky behavior.

But despite KAUFMAN 's general optimism that some corporations have begun to better heed pay principles along the lines of Feinberg's guidelines, he expressed concern over reports that some Wall Street firms are going back to what he called business as usual. Feinberg said it would be lamentable if banks once under his purview, and those beyond his reach that said they would voluntarily adopt the pay czar guidelines, instead reversed course.

The hearing was the first for KAUFMAN , who took the panel's gavel after its initial chair, Elizabeth Warren, stepped down to take an administration position and help set up the new Consumer Financial Protection Bureau. Feinberg is now judging claims related to the BP oil leak.

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