The recently released Congressional Oversight Panel report gave passing marks to efforts to limit cash compensation at seven institutions that received "exceptional taxpayer assistance'' through the Troubled Asset Relief Program.
But the panel said that Kenneth Feinberg, the program's Special Master for Executive Compensation, "has fallen short in his far broader goal of permanently changing Wall Street's pay practices."
Although past oversight reports have looked at executive compensation, the February report is unique in that it addresses that topic almost exclusively.
The seven companies deemed to be recipients of exceptional taxpayer assistance are American International Group inc., Bank of America Corp., Chrysler LLC, Chrysler Financial LLC, Citigroup Inc., General Motors Co., and GMAC Financial Services, now known as Ally Financial.
The report particularly praised Feinberg for decreasing the overall compensation for the top 25 executives at each of the seven companies by an average of 54.8 percent from from 2008 to 2009. In addition to those cuts, Feinberg also managed to reduce or cap annual cash payments for the same group of employees to $500,000 or less.
The successful imposition of such limits was deemed a major coup. Officials believed TARP restrictions were necessary to help taxpayers to recover their investment in the companies at the same time, executives needed to acknowledge taxpayer anger over inflated executive pay at bailed-out companies and press forward to stabilize the teetering financial system.
Feinberg was praised for assuring that stock received as salary by those same executives should be redeemable only over a four-year period. Such strictures would supposedly tie the executives' rewards to the long-term performance of the company rather than individual ambitions.
Finally, Feinberg to limit incentive payments to one-third of executive compensation (as required by Congress), while tying such payments to "specific, observable performance metrics." The Special Master met all of these goals while working under intense media scrutiny and growing taxpayer unrest.
But the report, approved unanimously by the five members of COP, was not without criticism. The panel found that the general lack of transparency surrounding Feinberg's actions (see especially pages 80 to 82 of the report) made it impossible to critically appraise his efforts to permanently change Wall Street's pay practices.
The report claimed, for example, that although Feinberg promised to set executive pay at rates comparable to those of other companies, he was not clear about how he selected the peer companies he used for comparison purposes. He also rarely explained to the public how he managed to classify companies akin to those under investigation, or how he went about setting pay in the light of conflicting goals.
Some critics have also claimed that paying executives in stock could lure those stakeholders into taking unnecessary risks to raise the value of their own shares, slashing the very safety net such compensation was meant to provide the company. The report offered no specifics as to whether that had been the case among the seven companies.
Perhaps the most critical assessment of Feinberg's performance relates to his decision not to "claw back" any pay that went to financial executives in the boom period leading up to the financial crisis. Although he deemed $1.7 billion in pre-crisis compensation be "disfavored" and perhaps inappropriate, he claimed that none was "inconsistent with the public interest."
Hence, the anticipated feeding frenzy surrounding exorbitant executive pay at companies on the verge of collapse ended with a dull thud. In the end, not a cent was clawed back from any executive of the seven companies. That inability to act could itself guarantee that Wall Street's pay practices will never permanently change.
In a final section of the report dubbed "Additional Views," (pages 89-91) two member of the panel returned to the theme of the "too-big-to-fail" status of the seven companies, among others, that got substantial government aid. The panelists -- Professor Kenneth R. Troske of the University of Kentucky and attorney and Certified Public Accountant J. Mark McWatters -- reiterated the warning that such intrinsic backstops will usually encourage excessive risk-taking, "since [companies] can reap the benefits but will not suffer the consequences if the gambles are unsuccessful."
In the presence of these government guarantees, they wrote, "both shareholders and executives have an incentive to design compensation schemes that reward executives for investing in risky projects." If policymakers truly want to change the manner in which Wall Street executives are compensated, the U.S. government must show the willingness to allow "too-big-to-fail" companies to suffer the same vicissitudes as medium and small corporations and ultimately fail without bailout. Until that time, they agree, "both shareholders and executives will continue to push for compensation plans that reward executives for focusing on risky projects."The other three panel members are Sen. Ted Kaufman of Delaware, who serves as chairman; Richard Neiman, Superintendent of Banks for the New York State Banking Department, and Damon Silvers, Director of Policy and Special Counsel to the AFL-CIO.