Wednesday, May 13, 2009

Executive Pay Reform from the Executive Branch?

From today's Wall Street Journal:

WASHINGTON -- The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter.

The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance.

Administration and regulatory officials are looking at various options, including using the Federal Reserve's supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.

Among ideas being discussed are Fed rules that would curb banks' ability to pay employees in a way that would threaten the "safety and soundness" of the bank -- such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing "best practices" to guide firms in structuring pay.

. . .

The discussions follow a narrower effort by the administration to clip pay at firms that get federal aid. Earlier this year, it issued guidelines limiting salaries for top executives at firms that received funds under the Troubled Asset Relief Program.

Congress chimed in with even tougher rules curbing bonuses for top earners at the same firms, among other things. One rule bars firms receiving federal funds from paying top earners bonuses that equal more than a third of their total compensation.

The administration is still wrestling with how to marry those two efforts, which in combination are more punitive than officials intended. The Treasury is expected to issue new rules sometime in the next few weeks.

Meaningful executive pay reform would be a major reversal from the administration's previous bonus protecting actions, so I'll try not to get my hopes up. But any noises of this kind are great to hear, and with the inevitable future AIG style scandals that will arise from the bailouts, we may end up with better and broader pay reform than anyone could have have imagined.

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