WASHINGTON — The government unleashed efforts on two fronts Thursday to rein in outsized executive pay packages and limit the excessive risk-taking that fueled the financial crisis.
The Treasury Department ordered seven big companies that haven’t repaid their government bailout money to cut their top executives’ average total compensation — salary and bonuses — in half, starting in November. Under the plan, cash salaries for the top 25 highest-paid executives will be limited to $500,000 and, in most cases, perks will be capped at $25,000.
The Federal Reserve came at the issue from another direction. It proposed to monitor pay packages at thousands of banks — even those that never received bailout money — to ensure they don’t encourage reckless gambles.
Neither plan, though, is expected to kill Wall Street’s culture of lavish pay. The Fed proposal doesn’t set specific limits on executive compensation, so it’s unclear how it would actually affect pay. And the Treasury plan covers only 175 people, with the pay limits lasting only until the companies repay what they received from the $700 billion bailout fund.
For the already struggling companies, it also introduces a new concern: brain drain. The executives targeted by “pay czar” Kenneth Feinberg are among the most talented and productive at their companies.
“These people are considered the brains of the machine,” said Steven Hall, who runs an executive compensation firm bearing his name. “They are who can pull you through the tough times. This will give them reason to leave.”
The Treasury plan is limited to the seven bailed-out companies — Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial. The Fed’s proposal is much broader in scope, covering nearly 6,000 banks and a wider range of employees — from executives to traders to loan officers.
Rather than set pay levels at specific banks, the Fed would review — and could veto — pay policies. The plan is subject to a 30-day public comment period.
David Yermack, a finance professor at the Stern School of Business at New York University, called Treasury’s pay curbs a “symbolic” act.
“I think the government is trying to make examples of some banks and hoping others will follow,” Yermack said. “I think that’s naive. Wall Street bankers and traders are motivated by money, and they’re going to work for whoever pays them the most.”
He predicted the seven firms would find ways to bypass the curbs through implicit promises that aren’t written in contracts.
“They could say to someone, `I’ll give you a really big bonus three or four years from now. Just be patient,”’ Yermack said. “There’s an understanding that if you play the game, you’ll be taken care of. That’s been going on as long as there have been businesses, and Feinberg isn’t going to be able to stop that.”
Feinberg restructured the pay packages for top executives to provide a base salary and a portion described as “stock salary.” The employees must hold the stock for two years. They can then sell only one-third of the stock payment each year for three years.
Feinberg said his goal was to tie compensation more closely to the long-term performance of the company.
In one pay plan, the three highest earners at Citigroup will receive a base salary of $475,000. Each executive also will be paid between $5.6 million and $5.8 million in company stock to be redeemed beginning in 2011. The third category of long-term restricted stock will equal $3 million for each executive.
The Feinberg plan provides an escape clause that might let some executives avoid the restrictions: It says the rules allow for “exceptions where necessary to retain talent and protect taxpayer interests.”
According to Feinberg, base salaries above $1 million were approved for the new CEO of AIG, and for two employees of Chrysler Financial.
Under a package approved by Feinberg over the summer, AIG CEO Robert Benmosche will get a pay package of about $10.5 million.
Feinberg became pay czar earlier this year as Congress was responding to outrage about huge bonuses being paid to AIG. Lawmakers amended the bailout law to require that executive compensation at companies getting exceptional assistance be curbed. Feinberg has been reviewing compensation packages since August.
President Barack Obama welcomed Treasury’s decision and urged Congress to pass legislation to give shareholders a voice in executive pay packages.
In an interview with CNBC, Feinberg was asked if he thought the restrictions would influence pay at other Wall Street firms outside his authority.
“I hope so, but that would be voluntary,” he said. “It’s not the government’s business.”
Some observers said the changes could have a broader influence on pay beyond the seven companies.
It’s also possible the restrictions could help govern pay at the thousands of banks that would be affected by the Fed’s plan, said Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance.