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Kenneth Feinberg says “revenge” motive would cut pay czar’s credibility

This coming week as Wall Street enters proxy season, compensation czar Ken Feinberg will issue his rulings for this year’s compensation packages for companies who received tax bailouts.

In his address to SABEW members Friday at Arizona State University’s Cronkite School of Journalism, Feinberg talked about how he arrives at his decisions for executive pay, as well as the growing anger among Americans toward what is seen as excessive compensation for those who work for troubled firms.

Feinberg, the Treasury Department’s special master stressed the limits of his job. First, he says he now only supervises the pay of the five companies who have not yet repaid their taxpayer bailout funds: AIG, General Motors, GMAC, Chrysler and Chrysler Financial.

He stressed the three main functions of his limited role:

• Control compensation of only the top 25 officials in those five companies.
• Create a compensation structure for employees 26-100.
• In a discretionary function, see to have returned excessive compensation paid to employees before the bailout.

Feinberg acknowledged the growing populist sentiment and outrage in compensation among taxpaying Americans who earned significantly less than those executives high-flying salaries. “The American people own these companies, they are creditors of these companies,” Feinberg said.

In calculating compensation, Feinberg considers the company’s competitive needs, and need for stability in corporate leadership. In addition Feinberg reviews corporate and independent data before setting compensation. Sometimes when companies suggest unreasonable compensation for executives, he reminds them of the American taxpayer anger. “I tell them, ‘there will be pickets at that person’s house,’ and for the most part, we’ve worked it out.”

Feinberg hopes his efforts, albeit in confined to five companies, offer some leverage into influencing the pay for other American companies. “In one sense we are having an impact on Goldman, Wachovia, Morgan Stanley to voluntarily” limit themselves, he said. “It’s a small early sign we’ll have a voluntary impact” on what some Wall Street execs will get in their paychecks.

As for the pay structures to be announced next week, Feinberg hinted that executives shouldn’t receive any more than $500,000 or less in base taxed salary. Feinberg also places limitations on stock grants, requiring that such compensation vest immediately and is not redeemable for two to four years.

Besides limits on salary, Feinberg said the compensation problem at American companies should be address through government regulation and stronger corporate governance. He asked, “Do we have the right people” who are on corporate compensation committees and board, people who are independent and strong enough to “push back” on pay issues.

Though Feinberg has the power to wrest money back from executives who might have been overpaid while their companies were sailing into trouble, he feels that pay that was legally given to executives should not be called back. But, Feinberg explains, past excessive pay could be a consideration for the pay he sets going forward.

Feinberg says the idea that “we’re out to get that person” would cut the credibility of his work as special pay master.