Geithner, Bernanke want executive pay standards

[March 25, 2009]  WASHINGTON (AP) -- One could almost hear the page turn.

Last week, Congress raged over employee bonuses paid by insurance conglomerate American International Group Inc. On Tuesday, lawmakers listened soberly as Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke called for a regulatory regime that would set compensation standards on financial institutions, including companies like AIG.

In another time, such a suggestion would have drawn protests from Republicans unwilling to interfere with corporate decisions. And Republicans may still draw the line at companies that receive taxpayer assistance.

But AIG and the overall travails of the financial sector have opened a seam in Congress for policy makers to renew a debate over limitations or conditions on executive pay.

Neither Geithner nor Bernanke offered specific proposals, but both men echoed the same idea -- linking incentive pay to an institution's long-term success. The compensation standards would be part of a broader regulatory overhaul that Geithner is expected to propose Thursday.

Democratic lawmakers and the Obama administration have been working on the outlines of a new regulatory regime. Among other things, it would give the government authority to intervene in troubled financial institutions, much as the Federal Deposit Insurance Corp. can step in to liquidate failing banks. The changes also would call for an overarching authority to help oversee risk by large institutions that are so big they can single-handedly undermine the financial system.

Behind the compensation concept is the belief that many financial institutions reward their executives for short-term, high-risk gains that have negative long-term consequences.

"It's very important that compensation links performance and reward appropriately and, in particular, does so in a way that does not incentivize excessive risk-taking," Bernanke told the House Financial Services Committee on Tuesday.

Industry watchers say that under such a plan, companies would be encouraged to provide bonuses, incentives and retention pay with deferred income, typically stock that vests after three, four or five years. Financial executives, the thinking goes, would thus act more prudently with an eye toward the institution's future.

The government could encourage such compensation arrangements through the tax code with a combination of incentives and penalties, according to private sector observers.

Geithner made it clear that he did not envision a system that placed the equivalent of government salary regulators inside corporate boardrooms.

"The government should not be setting detailed or prescribing detailed regulations to govern amounts of compensation and their distribution," he said.

Still, institutions chastened by the financial crisis may be more amenable to greater government influence over pay.

"The biggest compensation issue with the banks has been an overreliance on annual performance to drive incentive compensation," said David Wise, who advises companies on compensation issues as a senior consultant at Hay Group, a global management consulting firm. "Everyone understands that the banks need to rebalance their portfolios for more emphasis on the long term."

For now, the House Financial Services Committee will vote Wednesday on legislation that would prohibit any bonus payments by companies that have received any financial bailout funds until the money is repaid.

But the committee's chairman, Rep. Barney Frank, D-Mass., said he was eager to revisit broader limitations on executive compensation as a legislative issue.

"You think that should be done across the board with large financial institutions, whether or not they're receiving federal money?" he asked Bernanke.

"Yes, sir, I do," the Fed chairman replied.

Republican Rep. Peter King of New York seemed to sum up his party's quandary.

"All of us agree the AIG bonuses were wrong," he said. "But how do we protect against that without going too far?

The financial industry is wary as well. It doesn't like a proposal that would give company shareholders "say on pay" -- a nonbinding vote on compensation packages. Wise cautioned that "say on pay" could cause boards of directors to make compensation decisions based on short-term shareholder sentiment rather than the long-term interests of the company.

And Scott Talbott, chief lobbyist for the Financial Services Roundtable, said policy makers and lawmakers should be wary of a compensation regime that stifles creativity or the flow of capital.

"You don't want to have the government setting pay scales," he said, "but rather providing a framework that the company can tailor to its individual needs."

[Associated Press; By JIM KUHNHENN]

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