Pay Czar Seeks to Limit Salaries

In the course of the review of the aptness of the richest pay packages proposed by seven financial firms that received $200 billion in government aid, the U.S. pay czar Kenneth Feinberg is planning to cut the annual cash salaries for many of the top executives whose firms accepted bailout funds.

As an alternative to paying large cash salaries, the pay czar is planning to shift a large portion of an employee's annual salary to stock that cannot be accessed for several years. The percentage of salary to be diverted to stock is not yet clear, but it could be above 50% in some cases.

The stock compensation would be in addition to salaries and cash bonuses. This will be an incentive for the executive to make good long-term decisions about the company.

By mid-October this year, Feinberg expects to issue his judgment on compensation packages for 175 of the most-highly compensated executives and employees at the seven firms that received substantial support from the Troubled Asset Relief Program (TARP).

The seven firms whose compensation plans are under scrutiny are Citigroup Inc. (C - Analyst Report), American International Group Inc. (AIG - Analyst Report), Bank of America Corp. (BAC - Analyst Report), Chrysler Financial, Chrysler Group LLC, General Motors and GMAC Inc (GJM).

The pay czar has already used his concept with Robert Benmosche, the new chief executive of American International Group. Benmosche's salary was broken into two parts. Benmosche will annually receive $3 million cash salary and $4 million in AIG stock that cannot be accessed for five years.

On the other hand, the move could be very sensitive for BofA, which is searching for a new CEO to replace Ken Lewis, who announced plans to resign as chief executive of the company last week.

The Federal Reserve is planning to propose risk-based guidelines later this month. These guidelines would impact tens of thousands of bankers’ payment structure.

Some large financial firms that have already repaid government funds are JPMorgan Chase & Company (JPM - Analyst Report), Morgan Stanley (MS - Analyst Report), Bank of New York Mellon Corporation (BK - Analyst Report), Goldman Sachs (GS - Analyst Report), U.S. Bancorp (USB - Analyst Report), American Express Company (AXP - Analyst Report), BB&T Corporation (BBT - Analyst Report) and State Street Corporation (STT - Analyst Report). However, for many other firms the repayment of TARP money is unlikely for a long time as they face very difficult situations.

We think that the repayment of government money can be viewed as a sign of recovery of the institutions as well as the economy. Also, the full repayment of government money will enable bailed-out firms from having their executive compensation packages reduced. Restrictions on pay rules as a result of using government money were a major competitive disadvantage for those firms in retaining talented employees.

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