Obama Administration Restricts Executive Pay

The Obama administration recently launched a new proposal for the Treasury Department to oversee and restrict pay for corporate executives. The initiative is likely to have only small impact on pay for most companies, at least for now. However, it will have a large effect on seven of the nation’s biggest companies, who have been given billions of dollars of federal money in order to survive the recession.

Washington lawyer Kenneth Feinberg has been appointed to take the helm in policing the compensation of employees at Citigoup, Bank of America, and AIG, as well as Chrysler, General Motors, and their financing departments. Feinberg will have wide discretion in setting the salary caps and maximum bonuses for the most senior executives at the companies as well as the 20 most well-compensated employees at each company. The plan also asks for Congress to pass legislation to let shareholders participate by voting on pay levels, and to mandate that public companies shore up the independence of executive boards that are in control of setting pay for executives.

Feinberg, with the title of "special master for compensation," will be responsible for setting the salaries and bonuses a list of the top industrialists and financiers in America. That group of executives includes Citigroup’s Vikram S. Pandit, who received $38 million in salary and bonuses in 2008; Fritz Henderson, GM’s former chief executive, who was paid $8.7 million in 2008, and Kenneth D. Lewis, the CEO of Bank of America, who received $9 million last year.

Although Obama’s plan does not set a salary cap for these seven companies, there is an incentive included for companies that institute a cap voluntarily. If companies limit their pay to executives to $500,000 or less, their pay schedule will be automatically approved by Feinberg. However, he will be allowed to review compensation plans for the 100 employees who receive the highest pay, as well as any executives.

In considering whether or not executive pay is appropriate, Feinbert will be evaluating the profitability of a company, the compensation in the general marketplace or industry, the company’s ability to repay loans, and how much the pay packages will encourage risky decisions. Feinberg himself will not be receiving any compensation for the work he does administering this program on behalf of the Obama administration.