Former TARP pay czar Kenneth Feinberg said that "only time will tell" if he made the right choices when setting compensation for executives at TARP banks -- but he suggested that early data indicates he did.
Feinberg, testifying before the Congressional Oversight Panel, discussed the delicate line he had to balance when setting compensation: Make the pay too high, and run the risk of endorsing excessive rewards; make it too low, and run the risk that companies could have trouble retaining top talent.
Currently, 84 percent of the executives whose pay was approved by Feinberg remain with their companies, suggesting that he did find the right balance, Feinberg said.
Feinberg, who resigned the post earlier this year to administer BP's oil spill compensation fund, was testifying at the oversight panel's hearing on TARP executive compensation restrictions.
The hearing was the first under the chairmanship of Sen. Ted Kaufman (D-Del.), who took the job when Elizabeth Warren resigned to lead the creation of the Consumer Financial Protection Bureau.
"(E)xecutive pay is complicated and controversial, but it is also of profound importance," Kaufman said in his opening remarks. "If Treasury... can get executive pay right, it could help to lay the foundation for long-term financial stability. Any mistakes, on the other hand, could contribute to the next financial collapse."
As special master for executive compensation, Feinberg was charged with approving every cent paid to the 25 highest-paid executives at each of seven firms that received "exceptional" TARP assistance: American International Group Inc., Ally Financial (formerly GMAC), Bank of America Corp., Chrysler LLC, Chrysler Financial, Citigroup Inc. and General Motors Co. Three of those firms -- Bank of America, Citigroup and Chrysler Financial -- are no longer under the pay czar's thumb after paying back their assistance.
Feinberg also approved the pay structures -- but not the dollar amount -- of the next 75 highest-paid employees of those companies.
He continually downplayed his role during the hearing, at one point referring to his old job as a "sideshow," given the limited scope of the position.
Instead, he spent most of his testimony highlighting the principals he endorsed for responsible compensation policies, which primarily included limiting guaranteed compensation and cash payments and instead tying much an executive's pay to long-term performance, through stock that cannot be transferred for several years. "I think it's sort of elementary," Feinberg said.
"We wanted to try to minimize risk," he added. "We wanted to maximize taxpayer return. We wanted to make sure there was appropriate allocation between cash and equity. We wanted compensation tied to performance."
Those standards, Feinberg said, could serve as a model for compensation structures at financial institutions, regardless of whether they've received TARP aid. But Feinberg added that he doubts Congress or the Treasury Department will want to expand oversight of executive pay beyond the existing rules, and it remains to be seen whether Wall Street will return to "business as usual" on compensation once its high-profile TARP recipients exit the program.
COP panelist Damon Silvers praised Feinberg's work but questioned whether Feinberg's actions were serving as a model. "TARP seems to have perpetuated the wealth of the people and businesses that were responsible for economic catastrophe," Silvers said, citing a recent Wall Street Journal report that found that 35 of the top publicly held Wall Street firms are set to pay a record $144 billion in compensation this year, a 4 percent increase from 2009.
And Kevin Murphy, a business professor at University of Southern California, testified that the pay czar's policies were "a case study in why the government shouldn't get involved in regulating pay."
He explained that pay policies designed to advance the "public interest" were poorly defined and forced Feinberg to walk a narrow line between the interest of politicians, who sought to punish executives, and those of taxpayers, who themselves had a financial interest in attractive and retaining the best employees at the companies in which they were invested.
Murphy went on to say that pay such as signing bonuses, incentive bonuses, severance bonuses and stock options would have helped attract top talent to TARP companies but were prohibited under EESA.