Pay proposals from bailed out companies had many flaws, ‘pay czar’ tells panel

The pay proposals that the biggest bailed out companies made to the Treasury Department’s “pay czar” contained several flaws, Kenneth Feinberg, formally known as the special master for TARP executive compensation, said in congressional testimony.

The shortcomings indicated how reluctant the seven biggest beneficiaries of funds from the Troubled Asset Relief Program were to conform to Treasury’s guidelines for better aligning pay to long-term incentives. Feinberg significantly revised the compensation packages before announcing them last week.

Feinberg’s mandate included the top five executives and the next 20 highest-paid staff at seven companies which received especially large amounts of government aid – Citigroup, Bank of America, American International Group, General Motors, Chrysler, and the financing units of the two auto makers.

The main flaws in the original proposals, as listed by Feinberg in his testimony before the House Committee on Oversight and Government Reform, were:

• The companies requested excessive guaranteed cash – salaries and bonuses – for executives;
• The companies requested that stock issued to these executives be either immediately redeemable or redeemable without a sufficient waiting period;
• Many of the companies did not sufficiently tie compensation to performance-based benchmarks and metrics;
• Many of the companies did not sufficiently limit or restrict “perks,” such as private airplane transportation, country club dues, golf outings, and so on, and in some cases provided excessive levels of severance and executive retirement benefits;
• The companies did not make sufficient effort to fold guaranteed compensation contracts entered into prior to the enactment of the current compensation regulations into 2009 performance-based compensation.

Feinberg said that one of the revisions he made to the company proposals was to greatly reduce the amount of 2009 guaranteed cash compensation. On the whole, cash was reduced by approximately 90 percent, as overall total compensation was reduced by approximately 50 percent.

In place of cash, Feinberg substituted “stock salary,” which vests immediately upon issuance but may only be redeemed in three equal, annual installments beginning in 2011, or a year earlier if TARP obligations are repaid.  

Separately, The Wall Street Journal reported that Feinberg, while reducing bonuses at the firms, had actually increased the base salaries of several of the executives to keep them from leaving the companies.