Executive-Pay Crackdown: Bad for Business?

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Can the government revolutionize executive pay? Or is it going to handicap the very companies it just bailed out? We're about to find out.

On Thursday afternoon special master of compensation Kenneth Feinberg (yes, that's his title) released a report detailing pay cuts at the seven companies that have received the most government assistance since the financial crisis hit last fall. On average, pay for the top 25 employees at those firms will be halved, though some particularly large cuts — Bank of America's outgoing CEO Ken Lewis, who requested as much as $11 million this year, won't get any salary or bonus for 2009, for instance — dramatically skew that figure. The firms taking the cuts are Bank of America, Citigroup, General Motors, Chrysler, the insurer AIG and auto financiers GMAC and Chrysler Financial.

"This is the first step that our government has taken in trying to transition from principles of compensation to actual dollars to be paid to these executives," Feinberg told TIME shortly before his review was released to the public.

Feinberg said he had gotten a favorable reception to his determinations from the lawmakers and corporate executives who had seen his report so far. Nonetheless, Feinberg's rulings are likely to disappoint many. Even after the cuts, eight of Bank of America's 12 top executives will get more than $5 million each in 2009 compensation, though not all of that money will be paid out this year. Two of those executives will get more then $9 million. At Citi, 14 of its top 21 executives will get more than $5 million apiece. What's more, Feinberg's pay determinations do nothing to shrink the huge divide between Wall Street pay and that in the rest of the economy. For instance, Chrysler's highest-paid executive — with a total compensation of just under $700,000 — will get less in 2009 than the lowest paid top executive at Citi. That is sure to incite criticism that Feinberg didn't cut enough.

The companies that are taking the cuts and their employees are likely to be ticked off as well, to put it mildly. Restricting the pay of top performers is going to start a brain drain, they warn, of the very talent they need to rebuild their businesses. "Everyone at one of these firms regulated by the pay czar will have a firm grasp on the obvious — if you can get a job somewhere else, take it," says Wall Street recruiter Rik Kopelan.

Feinberg said that he believes the pay restrictions he set for these companies will not hurt their ability to retain and attract employees. His first goal in determining pay at the companies, he insisted, is not to hurt the companies' ability to pay back what they owe to taxpayers. The idea is to keep pay competitive at the firms he has oversight of, while at the same time creating a structure that would better align "long-term performance with long-term pay."

Under that new pay structure, gone are year-end bonuses. Instead, executives get a salary that is split between a cash payout and something Feinberg calls "salaried stock," which can be redeemed over four years. Incentive or bonus pay is paid in stock, but executives have to stick around for three years to get it. Companies that have received government assistance will have to have paid back all of their money from the U.S. Troubled Asset Relief Program (TARP) before executives can get their bonuses. "At the end of the day, if Wall Street is unhappy and Main Street is unhappy then I have probably struck a good balance," he said.

The companies that Feinberg had say over didn't make his job any easier. Six of the seven companies initially asked Feinberg for pay raises for their executives. Only Chrysler volunteered to cut salaries. What's more, AIG asked Feinberg to approve perks, including private-jet airfares, that topped more than $1 million extra for more than one of the insurance company's executives.

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