Fallout: The Financial Crisis

Executive pay reforms met with caution

John Dimsdale Jun 10, 2009
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Fallout: The Financial Crisis

Executive pay reforms met with caution

John Dimsdale Jun 10, 2009
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TEXT OF STORY

Kai Ryssdal: It’s not that the White House and the Treasury Department don’t want to regulate executive compensation. They are just going to go about it a little bit differently than they first thought. Today the Obama administration appointed what it’s calling a special master to manage the salaries of the top 25 executives at companies that have taken federal bailout money. Our Washington bureau chief John Dimsdale reports.


JOHN DIMSDALE: Wall Street banks complained bitterly that the government shouldn’t meddle with pay packages and that caps put them at a competitive disadvantage when attracting and keeping talented executives. Today Secretary Geithner agreed.

TIMOTHY GEITHNER: We do not believe its appropriate for the government to set caps on compensation. We are not going to prescribe detailed prescriptive rules for compensation.

Instead, Geithner endorsed giving stockholders an annual vote on the pay packages of the top five executive officers of all companies, not just banks. The votes would be nonbinding on boards of directors.

But shareholder say on-pay votes don’t sit well with many corporate managers. They say a simple salary number is incomplete. The Center on Executive Compensation represents HR executives at big companies. Senior Vice President Tim Bartl says shareholder votes, done right, are impractical for most investors.

TIM BARTL: If you’re looking at a large institutional investor or even a mom-and-pop investor that needs to read through 30 to 50 pages of comp disclosures for each company. It’s pretty difficult to come up with a meaningful view on pay for each of those firms.

Advocates of salary limits say pay-for-performance incentives at banks encouraged excessive risk taking. But Ira Kay at the management consulting firm Watson Wyatt, says only some incentives encourage bad executive behavior.

IRA KAY: We think companies should protect their core cash and stock incentives. But that they should be very flexible on the shareholder irritants such as perquisites and excessive severance, which some people call pay for failure.

Kay is just completing a large study which concludes it wasn’t pay incentives that prompted risky executive behavior. Instead he says managers were using broken business models that hid where the real risks were.

In Washington, I’m John Dimsdale for Marketplace.

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