Nearly three months after American International Group bonuses provoked an angry reaction in Congress, the Obama administration is ready to issue broad new principles on how to compensate top financial sector executives. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke want to give the Fed, which regulates banks, and the Securities and Exchange Commission, which oversees the financial markets, greater powers to set compensation guidelines across the financial sector.
In anticipation of the new guidelines, Geithner scheduled a private meeting Wednesday morning with SEC chair Mary Schapiro, Federal Reserve Governor Dan Tarullo and executive pay experts to discuss compensation policies.
The guidelines come as the administration also prepares to announce new regulations restricting bonuses to the most highly compensated employees at financial firms that obtained infusions from the $700 billion Troubled Asset Relief Program. The regulations, prompted by legislation passed by Congress earlier this year, would limit top executives to bonuses no greater than one-third of their annual salaries.
While 10 of the largest US banks got permission to pay back their share of the TARP money, executives at several other high profile firms would still fall under the new restrictions, including Citigroup Inc, Bank of America Corporation, American International Group Inc, Chrysler LLC and General Motors Corporation.
Those regulations, expected later in the week, would replace the administration's restrictions that applied only to banks that receive "exceptional assistance" from the government. Those limits set a $500,000 cap on pay for top executives and limited bonuses or additional compensation to restricted stock that could only be claimed after the firm had paid the government back. Executive pay is a politically charged issue. Bonuses totaling $165 million issued in March by insurance conglomerate AIG, which had received billions of dollars in government financial assistance, set off a public and congressional outcry.
Obama and his economic team have been trying to temper the populist urge to cap salaries while at the same time harbouring a belief that compensation practices contributed to the current crisis by encouraging high risk-taking.
"I think boards of directors did not do a good job," Geithner said Tuesday. "I think shareholders did not do a good job in terms of discipline and compensation practices."
The financial sector has been pushing back, arguing that restrictions that are too stringent could drive away professional talent.
"This is the opening of Pandora's Box," said Tom Quaadman, an expert on financial institutions at the US Chamber of Commerce. Gene Sperling, a counselor to Geithner, is scheduled to testify Thursday about compensation practices before the House Financial Services Committee.
It was unclear Tuesday how much of its executive pay package the administration planned to detail this week and how much it would include in a broader list of regulatory proposals that President Barack Obama will announce next week.
"A centrepiece of sensible reforms will be to tie compensation to better measures of long-term investment and return and to adjust them to reflect the risk," Geithner told a Senate appropriations subcommittee on Tuesday.
The new regulations stem from legislation Senator Christopher Dodd inserted as an amendment to the economic stimulus package earlier this year. The legislation affects companies that have received assistance under the $700 billion Troubled Asset Relief Program. One of its provisions requires the treasury secretary to seek reimbursement of any compensation paid to a TARP recipient's top 25 employees if Treasury deems the payments contrary to the public interest.
To undertake that review, the administration plans to retain Kenneth R Feinberg, a lawyer who oversaw payments to families of victims of the September 11, 2001, terrorist attacks, according to people briefed on the selection.
AP Economics Writer Martin Crutsinger contributed to this report.