Cash

As we enter the New Year, with familiar chat of resolutions and crystal balls, it would be interesting to glimpse the future – maybe five years from now – to see how the issue of excessive executive compensation has played out in the business world.   The outrage over salaries and bonuses at Wall Street firms, and the role they play in encouraging risky behavior by those organizations, is real and still politically raw. Yet for all of President Obama’s recent criticism of “fat cats” on Wall Street, his administration and the Congress have thus far proven unable to even begin addressing the issue in any fundamental way.

New evidence of that can be found in the current The New York Times Magazine cover story, “What’s a Bailed-Out Banker Really Worth?” which focuses on the work of Kenneth Feinberg, the Washington, D.C. attorney appointed to serve as “pay czar” for companies receiving bailouts under the federal TARP (Troubled Asset Relief) program.  Writer Steve Brill examines the process by which Feinberg developed and has attempted to implement a program that would limit cash salaries (to no more than $500,000 annually) while replacing cash bonuses with stock that would have to be held for several years before shares could be sold.

It’s an issue of enormous complexity.   As Brill notes, “over the last 50 years, the ratio of top pay to average pay at public companies has multiplied roughly 11 times (24:1 to 275:1).  That’s more pay in one workday for the chief executive than his average employee makes in a year.”   On the other hand, “whatever the approach, even defining fair compensation is harder than it looks, as is implementing reforms that don’t have unintended consequences.”

Indeed, after spending most of his energy detailing the politically adroit fashion in which Feinberg has dealt with executives of insurance giant AIG (now 80 percent-owned by the U.S. government), Brill spends relatively little time examining the bigger picture and potential solutions.   His pessimistic conclusion:

The larger issue isn’t whether we should admire Feinberg for finessing his way to a middle ground or jeer him for not throwing down the gauntlet. Rather, the clearest lesson that has emerged so far from his nine months of tortured choreography is that if it’s this hard to inject even a limited measure of common sense into the way executives are paid at companies that taxpayers partly own and control, broader change requires a boardroom upheaval.

Brill quotes experts such as Professor Jonathan Macey of Yale Law School, who has written widely about how government efforts to regulate pay have backfired, arguing that corporate boards are the only route to real change. “What I object to about the process Feinberg engaged in,” Macey tells Brill, “is the pretense that he can develop some superior system. . . . It’s not that people in charge don’t know how; it’s that they don’t want to.”  In fact, Brill suggests, one key to reform of executive compensation practices may be pension funds and other institutional shareholders who have the expertise and power to influence boards of the companies they own.

Federal legislation requiring an annual “say-on-pay” advisory vote by investors has been approved by the U.S. House of Representatives; similar legislation is pending in the Senate.  Financial services giant Goldman Sachs Group last month agreed to hold an advisory shareholder pay vote.  So far, at least 38 U.S. companies have pledged to hold voluntary “say on pay” votes on compensation, and  in the 2010 proxy season institutional investors plan to introduce about 100 proposals seeking annual advisory votes on compensation, according to RiskMetrics, a leading provider of risk management and proxy advisory services.