Wall Street Criticizes Government's 'Pay Cuts' Initiative

The Obama administration’s moves to rein in executive pay met criticism on part of Wall Street. Lenders like Bank of America Corp. said the measures may hurt the very companies the U.S. is intent on saving.

Photo: Wall Street Criticizes Government's 'Pay Cuts' Initiative

"People want to work here but they want to be paid fairly," said Scott Silvestri, a spokesman for Bank of America, the recipient of $45 billion of bailout funds. Rivals are "identifying our top performers and using pay concerns to recruit them away for fair-market compensation," he said.

Kenneth Feinberg, the Treasury Department’s special master on compensation, said yesterday he had slashed total pay for the executives he scrutinized at firms including Bank of America, Citigroup Inc. and American International Group Inc. by 50 percent on average. The Federal Reserve, moving in tandem, announced guidelines aimed at making bank compensation more tied to risk management.

Together, the measures are meant to address what the Obama administration calls unchecked risk-taking fueled by excessive pay. The credit-market meltdown that followed led to a financial crisis that caused more than $1.6 trillion in losses and writedowns worldwide and 7.2 million U.S. job cuts.

Bailed-out companies brought yesterday's crackdown on themselves, said Stuart Grant, an investor lawyer and managing director of Grant & Eisenhofer PA in Wilmington, Delaware, Bloomberg reports.

It was also reported, while the moves on government's part had been anticipated for weeks, Thursday's separate announcements by the Federal Reserve and Treasury Department represent unprecedented federal intervention in pay decisions traditionally left to boards and shareholders.

The crackdown is likely to influence how financial firms pay top executives, traders, loan officers and others whose actions could threaten the soundness of the institutions. Compensation experts said it would be hard for companies to escape the new oversight, though individuals could do so by jumping to hedge funds, private-equity funds and other financial firms beyond the reach of the new curbs.

The central bank moved to incorporate reviews of compensation into its routine regulatory process, a step that will affect large and small financial firms across the U.S. as well as American subsidiaries of non-U.S. financial companies. Some state regulators said they plan to issue similar requirements for state-regulated banks not covered by the Fed plan.

"I think it will make an important difference" because many banks have been reluctant to change their pay practices unilaterally out of competitive worries, said New York's banking superintendent, Richard Neiman, The Wall Street Journal reports.

It was also reported, right now, it seems likely that Congress will pass a “say on pay” bill, giving shareholders the right to vote thumbs-up or thumbs-down on executive pay. (It has already passed in the House of Representatives.) But that is just a starting point, since, after all, say-on-pay would be only an advisory vote, and wouldn’t be binding on the board.

Instead, Ms. Minow believes that shareholders need the ability to vote directors off the board if they feel they are doing a bad job — on executive pay or anything else. Right now, the deck is so stacked that is nearly impossible, especially since many companies don’t allow simple, majority votes to elect (or reject) directors. But the most straightforward way to shrink the oversize pay of Wall Street executives — and, more generally, curb the excesses of executive pay — would be to make directors more accountable to the company’s shareholders.

As well-meaning as Mr. Feinberg is, and as diligently as he worked through his assigned task, he shouldn’t be the pay czar. No one person should be. That’s a job more properly reserved for shareholders. You know, the ones who own the company, The New York Times reports.