Bonus response “perfectly justified”, says pay czar

The public outcry over hefty discretionary pay awards at financial firms is justified, says the US Treasury's special master for executive compensation, Kenneth Feinberg.

Speaking in an exclusive interview with Risk, Feinberg says: "Of course there's an emotional response, and rightfully so. In a time with a very uncertain economy, when there's 10% unemployment, when small businesses and large businesses are uncertain over their financial future, huge bonuses and compensation do trigger great emotion. It's perfectly understandable and justifiable."

The comments by the Washington, DC-based lawyer come amid public anger at continuing high levels of discretionary pay at some large financial firms. In the UK, these awards have led to the announcement of a one-year tax of 50% on bank bonuses exceeding £25,000 ($40,874). In the US, the bonuses have pushed the Obama administration towards proposing a 15 basis point tax on debt for financial firms holding more than $50 billion in assets. The fee would be effective from June 30 and last for 10 years, or as long as necessary to repay funds disbursed under the Troubled Asset Relief Program.

Such charges could be effective in capping the overall size of compensation at financial companies, says Feinberg, something he is personally unable to undertake. "The one major problem I can't address with my prescriptions is the size of some of this compensation. That's where the administration's concept of a tax kicks in, to rein in the magnitude of the compensation, even if the prescriptions are followed," he says.

Despite agreeing with criticism over bank bonuses, Feinberg refrained from chastising Fannie Mae and Freddie Mac over recent hefty discretionary pay awards at the two government-sponsored mortgage lenders. The two firms lack publicly traded stock with which to compensate their staff and also share uncertain financial futures, creating a difficult situation, he says: "Fannie and Freddie have two problems that other companies don't face. They have no stock, so all compensation is in cash. And the future of Fannie and Freddie is so uncertain it's very difficult to impose long-term performance metrics when they might not be around in the future. So it's a tough, tough situation."

Of course there's an emotional response, and rightfully so. It's perfectly understandable and justifiable

Fannie and Freddie are not firms that come under Feinberg's jurisdiction as special master. In fact, since Bank of America and Citigroup made their final repayments of government funds in December 2009, Feinberg only holds sway over compensation at five companies: American International Group, Chrysler, Chrysler Financial, General Motors and GMAC. For these five firms, Feinberg is empowered to approve or reject compensation for the top five executives and 20 next most highly paid staff, as well as compensation structures that apply to the top 100 employees.

Since his appointment last June, Feinberg says progress has been made in reforming compensation at the companies falling under his jurisdiction. Additionally, he cites measures such as the voluntary reduction of cash bonuses at some financial firms as evidence that Treasury measures are having a wider effect: "I think we've been successful in many banks and financial institutions on Wall Street adopting the executive compensation prescriptions voluntarily. That includes prescriptive determinations that cash-based salary should be very low, that most salaries should be in the form of stock and that stock should not be redeemable for two, three, four or five years." Banks including Goldman Sachs, Morgan Stanley, SunTrust and Wells Fargo all appear to have voluntarily adopted such measures, he adds.

However, it is "premature to declare victory", says Feinberg. Despite the attention compensation issues have recently received, progress in the area is just a small part of the reforms that need to be made in the wake of the financial crisis. "The progress that has been made is in the structure and the principle of compensation. There's a lot that still remains to be done in the area of corporate governance, in the area of regulatory reform, in the area of compensation review by the Federal Reserve, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission, and international attempts to deal with excessive compensation by the Group of 20," he says. "That's why I say I've made some progress, but that progress is by no means the entire package of reforms that are necessary."

The full interview with Feinberg will appear in the February 2010 edition of Risk.