Wednesday, July 8, 2009

The Compensation Czar

Last month, the Obama administration announced the appointment of Kenneth Feinberg (photo at left) as the Special Master for TARP Executive Compensation (the “Special Master,” commonly referred to as the “compensation czar”). At the seven firms that have received “exceptional assistance” from the government - AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial - the Special Master must determine whether the compensation payments and structure for the senior executive officers and the twenty next most highly compensated employees may result in payments that are inconsistent with the purposes of TARP or contrary to the public interest. Additionally, regarding any remaining executive officers and the 100 most highly compensated employees, the Special Master must determine whether the compensation structures may result in payments that are inconsistent with the purposes of TARP or contrary to the public interest. The Special Master may also render advisory opinions on his own initiative as to whether compensation payments or structures at any TARP recipient meet the appropriate standards.

Whenever the Special Master reviews compensation payments or structures for consistency with the purposes of TARP or conformity with the public interest, he must consider the following principles: 1) avoidance of incentives to take unnecessary risk, 2) taxpayer return, 3) appropriate allocation among the components of compensation, 4) appropriate portion of performance-based compensation, 5) comparable structures and payments, and 6) employee contribution to TARP recipient value.

Feinberg is a lawyer who has worked for the federal government, and more recently has headed his own law firm. He is perhaps best known for his role as Special Master in charge of dispensing billions of dollars to victims of the 9/11 attacks. Feinberg, however, apparently has no experience working at financial institutions, insurance companies, or car manufacturers, and yet he will be setting pay for over 100 employees at each of seven companies in these industries.

The labor market in the banking industry is highly competitive, with certain institutions - notably foreign banks - aggressively pursuing employees of banks that received TARP money. Will Feinberg allow these companies to pay their highly compensated employees enough to prevent them from jumping ship? The two car companies subject to the Special Master’s oversight are winding their way through bankruptcy court and are trying to reinvent themselves to become competitive in a highly volatile industry. What is the appropriate pay for the CEO of a car company, once the crown jewel of American manufacturing, which is feverishly switching gears to build cars that people want? The six principles mentioned above will help, but they will get Feinberg only so far. I question whether Feinberg has the proper experience or can possibly acquire all the necessary information about the banking, insurance and car industries to deem what constitutes appropriate pay for the affected highly compensated employees.

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  1. Great post, Allen! It'll be interesting to see how Feinberg performs in the next several weeks; I guess which way he is leaning on the issue ...

    I frequently feel, with all the furor surrounding the topic of execomp, the public (and its government representatives) are losing sight of the very real counter arguments of why this compensation is paid, and the costs of not paying it.

  2. VERY interesting. Consider too that somebody who's essentially an industry outsider will not realize some of the little things. For example, the NYT article to which Allen links discusses that employees all over the industry are jumping ship. This is partly because changing jobs is often accompanied by an upfront or sign-on loan or bonus, which can be as high as 200% of one's annual salary. However, these upfront loans or bonuses that financial industry employees receive upon commencing employment are not necessarily counted as compensation: they are not taxed as income, at least not right away. Instead, taxes are taken out on the upfront money over a 5-7 year strech rather than in a single tax year, which affects how much the taxpayer is getting back. I am not sufficiently familiar with the new comp laws to see whether these sign-on sums are affected or counted, but they could be missed by somebody without experience in the industry. So, to Allen's point, I second the caution concerning Feinberg's appointment because of his lack of industry experience. That said, to the point of the NYT article, to the extent there are firms out there who will not be overseen by the Special Master, they could potentially have an artificial competitive advantage over those that are - becuase the talent will follow the money. I am not convinced that bailout money and oversight ought to have punitive consequences on firms because ultimately, the intent of TARP is to save them, not to damage them further. Yet, uneven regulation or salary control that is not sensitive to competitive pressures may have just that unintended punitive effect on the very firms we are all paying to resuscitate.

  3. Guys,

    It was reported this morning that AIG and Feinburg are discussing the distribution of bonuses (based on 2008 performance).


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