Geithner and Shapiro say remuneration regulation will emphasise risk management, longer time horizons and transparency
WASHINGTON, DC - The US Treasury and the Securities and Exchange Commission (SEC) have issued statements on the direction compensation reform will take under the Obama administration - saying they will not put caps on pay at financial firms.
The Treasury's "we will not cap pay" promise does not extend to the recipients of government funds through the Troubled Assets Relief Program (Tarp), for whom a Treasury interim final rule statement stipulated bonus limits, blocks on golden parachutes, and a clawback for bonuses deemed inappropriate.
Treasury secretary Timothy Geithner and SEC chairwoman Mary Shapiro outlined their industry-wide visions for remuneration reform in broad statements, highlighting the need for bonuses to be closely tied to risk management, emphasising the long-term nature of those risk horizons, and stressing the part transparency and disclosure requirements will play in new pay rules.
Shapiro's statement focused on executive compensation and transparency rules, while Geithner's did not distinguish between the levels of employees to whom the rules will apply and made more overt reference to the application of the rules throughout financial firms.
Geithner's 'broad-based principles' began by stressing the need for an extension of performance-based pay metrics from stock price alone, for individuals, business units and the firm as a whole.
The SEC disclosure emphasis runs true to expectations, as the regulator has already proposed extending disclosure requirements for pay structures for more employees within the firm.
"I firmly believe better disclosure of compensation leads to more informed shareholders and in turn to more accountable corporate directors," said Shapiro. "This is the foundation of our capital markets."
The Treasury secretary said risk managers would play a greater role in setting remuneration policies and providing a corrective influence against the kind of misaligned incentives that contributed to the crisis.
"At many firms, compensation design unintentionally encouraged excessive risk-taking, providing incentives that ultimately put the health of the company in danger," he said. "Meanwhile, risk managers too often lacked the stature or the authority necessary to impose a check on these activities."
On extending the time horizons for risk-based remuneration, Geithner said reform needed to extend "beyond top executives to those involved at different levels in designing, selling and packaging both simple and complex financial instruments".
The role of shareholders and effective disclosure feature heavily. Geithner said Treasury would push Congress to give the SEC new powers to force firms to give shareholders a non-binding vote - or 'say on pay' - on executive compensation packages. He also added the necessity that "golden parachutes and supplemental retirement packages align the interests of executives and shareholders".
Shapiro - seen as the more reluctant party to heavily regulate in the compensation debate - highlighted the SEC's traditional position against capping pay and stressed the importance of disclosure rules in its preferred approach to reform.
"That is why the SEC is actively considering a package of new proxy disclosure rules that will provide further sunshine on compensation decisions," she said. "While these proposals would not dictate particular compensation decisions, they would lead companies to analyse how compensation impacts risk-taking and the implications for long-term corporate health of the behaviour they are incenting."
Geithner stressed remuneration committees will have punitive transparency requirements that until now they have been sheltered from. He also intends to give the SEC the power to ensure the committees are more independent, and meet standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act.
The SEC executive compensation statement can be read here.
The Treasury compensation statement can be read here.
The Treasury's compensation and corporate governance interim final rule for Tarp firms can also be read here.
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