Editor's note: Barack Obama will be sworn in as the 44th president of the United States later Tuesday. After his election in November, TheStreet.com wrote a series of articles about how his administration could affect Wall Street. This article was originally published Nov. 7. Democrat Barack Obama's election to the White House may be the final push needed to rein in over-the-top CEO salaries. At first blush, the president-elect seems to endorse the idea of curbing excessive pay. Obama in March called for a "shift in cultures of our financial institutions and our regulatory agencies" in a speech at Cooper Union in New York. Among the changes Obama advocated was "to realign incentives and the compensation packages so that both high-level executives and employees better serve the interests of shareholders," according to a transcript of the speech. ( Photo gallery: Obama Takes Office) "The environment is certainly ripe to push for more meaningful reform," says Michael Garland, the director of value strategy at activist pension fund investor CtW Investment Group. "People are disgusted not only by the level of pay, but also by the perverse incentives that our current pay system has fostered." Both Obama and Republican John McCain had made noise on the campaign trail about the need to rein in executive pay, but Obama's rang more true to some advocates of the issue. Any major limits put on executive compensation would not be in line with McCain's core constituency "which is big business," says Richard Ferlauto, the director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees, or AFSCME. In contrast, Obama "expanded the grassroots base of the Democratic party by bringing in new constituencies. So reforming CEO pay emerges really as a symbol for a government that believes that the country needs to serve Main Street as well as Wall Street."
AFSCME and CtW Investment Group have been particularly active shareholders in seeking major change, including the removal of top senior executives and board members of several major financial firms that were at the root of the subprime mortgage meltdown. "Our expectation is that the administration is going to be strongly supportive of meaningful executive pay reform," Garland says. "That ranges from the say-on-pay bill to other means of getting pay right and linked to long-term sustainable value creation. Wall Street financial firms in general are clearly going to continue to be a focus." Executive pay reforms are gaining traction across Capitol Hill. As part of the U.S. Treasury's $700 billion bailout package that is still being tweaked each day, the government is investing $250 billion into banks through the purchase of preferred shares. As a condition for accepting the capital, however, the banks are subject to rules such as getting the Treasury's approval to increase the dividend on its stock as well as scaling back executive compensation packages. The curbs involve claw back provisions, limits to golden parachute packages and tax deductions on executive compensation, and curtailing pay that incentivizes excessive risk already in the bank bailout package. Indeed, taxpayers want to make sure that they are not footing the bill for billions of dollars in Wall Street bonuses, particularly in the worst financial crisis since the Great Depression. Last month Rep. Henry Waxman (D., Calif.) asked the CEOs of the nine largest banks receiving capital from the Treasury for information regarding executive compensation. Perhaps more dauntingly, New York Attorney General Andrew Cuomo just a day later sent letters to the same nine banks, including Citigroup ( C), Bank of America ( BAC), JPMorgan Chase ( JPM) and Morgan Stanley ( MS) to scrutinize bonus payments to senior management.
One of AFSCME's primary goals has been to get companies, particularly financial firms, to implement an advisory vote on executive compensation. Continuing from last year, the ASCME will be pushing for further say-on-pay reform as well as splitting the chairman and CEO roles at more financial firms, Ferlauto says. He expects say-on-pay reform to become a "core principal of a broader reform package that will move through Congress more quickly," he says. And Ferlauto and his team could get support. After say-on-pay legislation has passed the House of Representatives in 2007, Sen. Obama became the chief sponsor of a similar bill in the Senate. AFSCME is also looking to "better define" the "nebulous" requirements for further regulation on excessive risk taking, "by submitting proposals that require the holding of all equity awards for two years past retirement with a company so that the interests of the CEO will be exactly aligned with the interests of the shareholders," Ferlauto says. Garland adds that it will be interesting to see just how committed Obama is toward executive pay reform and stronger investor protections in general by seeing who he appoints as the next chairman of the Securities and Exchange Commission. "My opinion is that something has to happen," says Joseph Leonard, founder and CEO of Coastal Investment Advisors in Southport, N.C. "It's one thing when a company is paying for that exit plan, but it's a whole other story when the federal government is bailing them out using taxpayer dollars. The demand of the general public for the government not to be spending these dollars on these executive compensation plans will push this through." Leonard expects something to happen over the next 18 to 24 months.
Some industry observers are against sweeping changes on executive compensation. "I suspect
the Obama administration will be dealing very harshly with the issue," says Chip Hanlon, president of Delta Global Advisors and a contributor to RealMoney.com, a sister site to TheStreet.com. Yet " if they try to create rules for executive compensation for publicly traded companies that had nothing to do with the bailout, that would be an outrage and the markets would react very poorly to that," Hanlon says, who says he leans right politically and is a free market advocate. "That being said -- it's perfectly reasonable if you run into the arms of government then you play by its rules," he adds. Across-the-board executive comp reforms could have some "unintended consequences," says Jim Allen, CFA Institute's Capital Markets Policy director. Allen likened the concerns to Congress' reforms to executive compensation packages in the early 1990s, in which companies began using more performance-based options. "It wasn't very well thought out when they did it," he says, because the options were tied to overall market performance rather than companies' peers. Thus, compensation rewarded senior executives for performance of the market as opposed to their own company. The American Bankers Association also has concerns about implementing across-the-board executive compensation limits. "Restrictions on compensation would be impossible to administer across banks of all sizes and types and would cost the participating banks good employees in a competitive employment market," according to a letter sent to Treasury Secretary Henry Paulson last week by Edward Yingling, the president and CEO of the American Bankers Association.
The letter was one in a series that addressed concerns the association has regarding Treasury's capital purchase plan. A spokesman said Thursday that the group is "willing to work with the new administration to make sure they understand our concerns." Sun Microsystems ( JAVA) investors earlier this week became the latest shareholders to vote for nonbinding say on pay measure at the company. Sun said it would take the idea under advisement. Last year, insurer Aflac ( AFL), became the first publicly traded company to voluntarily grant shareholders a nonbinding say on pay. And with the threat of overarching compensation reform, other companies may take it upon themselves to institute changes so as to lessen the pain. "It may actually be that the threat and overhang of potential government action will cause some companies to go ahead and relent on some issues such as say-on-pay
proposals, but it remains to be seen," Allen says.