Obama Pay Plan Lacks ‘Meat on the Bones’ to Trim CEO Paychecks  

By Ian Katz

June 11 (Bloomberg) -- The Obama administration’s pay proposals may lack the “meat on the bones” to rein in firms accused of overpaying executives.

“A lot of people would have liked to have seen more meat on the bones,” said Mark Poerio, a partner focusing on pay at Paul, Hastings, Janofsky & Walker LLP in Washington. “If companies have been following the executive compensation debate and development, they just have to follow through.”

The plan announced yesterday by Treasury Secretary Timothy Geithner would require companies to give shareholders a non- binding vote on pay, without setting limits. Directors who determine the pay and consultants that advise companies would have to be more independent from management, Geithner said.

The administration proposal is aimed at reducing incentives that lead executives to take excessive risks and quell a political uproar over bonuses paid managers at companies including American International Group Inc. that received U.S. aid. Geithner blamed pay standards tied to short-term profits for contributing to the worst financial crisis since the 1930s.

“We’re not telling clients to be prepared for less pay,” said David Schmidt, a senior consultant for New York-based compensation firm James F. Reda & Associates. Forms of payment may be adjusted as firms give executives additional cash and put some part of their bonuses in escrow for three to five years, making pay dependent on long-term performance, he said.

Changing pay practices is part of an initiative by Obama to overhaul U.S. financial rules. Obama will unveil specific proposals for streamlining and reorganizing regulation on June 17, White House Press Secretary Robert Gibbs said this week.

Pay Declining

Overall, pay is declining for the highest-ranking financial executives. Average compensation for chief executive officers at the 50 largest financial firms who were in their jobs throughout 2007 and 2008 fell 25 percent in 2008 to $9.8 million from $13 million a year earlier, according to data complied by Bloomberg.

The Obama plan also creates a “special master” to review pay at companies that get U.S. aid. Washington lawyer Kenneth Feinberg will review “the soundness, the appropriateness” of pay for the top 100 executives of seven companies that got aid through the Troubled Asset Relief Program, Gibbs said. Oversight will continue until the aid is repaid “to protect the taxpayers,” he said.

Separately, Treasury issued pay restrictions yesterday for recipients of the aid as required in a bill passed in February. The measure limited bonuses for senior executives and the next top 20 employees at companies getting more than $500 million from TARP. The rules apply to other companies on a sliding scale based on their level of assistance.

Say-On-Pay

The administration proposal, which needs congressional approval, would authorize the Securities and Exchange Commission to require so-called say-on-pay, a nonbinding shareholder vote on compensation including salary, bonuses and stock awards for the top five executives at public companies.

Say-on-pay isn’t “the panacea some people are claiming,” said Mark Borges, a principal at Compensia Inc., a San Francisco-area pay consultant. “If you see it as an instrument for dialogue between the shareholders and the board, then it can be useful.”

Steven Hall, managing director at Steven Hall & Partners LLC, a New York-based compensation consulting firm, said the vote requirement may complicate pay decisions. “At what point does a non-binding vote become binding because you can’t ignore it anymore?” he said.

Under the Obama proposal, compensation committees will be responsible for choosing and overseeing pay consultants, which “must report directly” to the committee, the Treasury said in its statement explaining the measures.

Frank Support

That provision, aimed at increasing the independence of the panels, “goes a little farther than where it’s been historically,” said Poerio.

House Financial Services Committee Chairman Barney Frank said yesterday he endorsed the plan while disagreeing with the administration position on pay committees.

“Given the inherently close relationship that exists between CEOs and other top executives on the one hand, and boards of directors on the other, 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 in a statement.

The committee holds a hearing today in Washington to examine executive pay practices. Witnesses include Treasury Counselor Gene Sperling, Fed and SEC officials.

The Federal Reserve is working on its proposals to make sure firms have the right incentives for setting pay policies, Fed Governor Daniel Tarullo said yesterday. Geithner said the Fed and other bank regulators will define “standards and principles that supervisors would use to help bring about reforms in compensation practices in the financial industry.”

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net.

Last Updated: June 11, 2009 00:01 EDT