Updated from 2:13 p.m. EDT
The Obama administration on Wednesday took its first swing at Wall Street pay, outlining broad guidelines for compensation at financial firms and more stringent rules for those that have received bailout funds.
The Treasury Department will be closely monitoring the pay packages of employees at firms that received funds from the Troubled Asset Relief Program. The interim regulations plan to cap bonuses of top executives and highly paid employees, impose clawback provisions and limit the use of "golden parachutes."
The Treasury is also appointing well-known attorney Kenneth Feinberg, who oversaw the distribution of payments to 9/11 victims, as a "special master" to review compensation practices.
Feinberg will be charged with scrutinizing any pay packages exceeding $500,000 and renegotiating those that seem excessive. In addition, firms will have to limit any "luxury" spending -- an apparent response to public outrage over big-ticket spending for office renovations, marketing events, resorts and travel at firms like
American International Group
, Merrill Lynch and its new owner,
Bank of America
TARP recipients will also have to improve transparency and accountability for compensation practices. Firms will have to install "say on pay" provisions so that shareholders have an opportunity to vote for or against them, and they'll have to disclose more about executive perks and consultants. Furthermore, executives will not be allowed to take advantage of "tax gross-ups" that distribute additional payments to cover taxes on compensation.
Treasury Secretary Timothy Geithner also outlined four broad goals for new regulations across the financial sector earlier on Wednesday after meeting with
Securities and Exchange Commission
Chairwoman Mary Schapiro and
Governor Dan Tarullo.
Compensation needs to be tied to performance while accounting for the time horizon of risks taken, Geithner said. It must ensure that proper risk management is in place. Finally, so-called "golden parachute" packages awarded to departing executives, as well as supplemental retirement packages, need to be examined to ensure that the interests of shareholders are taken into consideration as much as those of executives.
Geithner called profligate executive compensation practices a "contributing factor" to the financial crisis.
"Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage," he added.
Speculation had heated up in recent days about what type of restrictions on pay the Obama administration might impose. Unconfirmed reports first surfaced that firms like BofA,
and AIG, which had tapped government lifelines more than once, would face stricter limitations on executive pay. Others suggested that Congress might come up with its own competing guidelines for the industry, causing confusion and contradiction.
A battle may yet ensue, given a statement from Financial Services Committee Chairman Barney Frank (D., Mass.), who said he believed the Treasury should have gone further in its guidelines.
"I believe that we should be going beyond the proposals the secretary makes with regard to the compensation structure," said Frank, "and adopt legislation that mandates that the SEC adopt appropriate rules that embody these principles."
Geithner, on the other hand, worked to downplay concerns in the financial sector that the government would go overboard and impose draconian rules across the board that would hamper competition.
"I want to be clear on what we are not doing," said Geithner. "We are not capping pay. We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive. Instead, we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives."
Jim Gardner, chairman of Commerce Street Capital, said he wasn't surprised by different views. Regulators are working to ensure the safety, soundness and competitiveness of the American financial system, he said, while lawmakers are more intent on catering to frustrated voters.
"Passing out money to banks has not been particularly popular with John Q. Public," said Gardner. "Congress is zeroed in on getting elected."
The Securities Industry and Financial Markets Association (SIFMA), an industry group that represents a wide array of firms ranging from big banks like BofA, Citi,
to regional firms like
issued its own guidelines on Wednesday, striking a similar tone to Geithner. The group highlighted risk management, performance and transparency as key goals of reform.
"Together, we can build a better system that aligns compensation with the interests of shareholders, safeguards the financial system and strengthens the economy," said SIFMA President and CEO Timothy Ryan in a statement.
The group said the board of directors should oversee practices and oversight, with help from risk-management professionals who are "appropriately independent."