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The Pay Czar Is Making Sense

I was pretty dubious that Ken Feinberg, the administration pay czar, would have much effect on Wall Street compensation--even at the handful of TARP basket-cases (AIG, GM, BofA, Citi, etc.) where you'd expect the administration to have leverage. In weaker moments, I even imagined Feinberg as a kind of a fig leaf, whose very existence confirmed that the White House didn't think there was much to be done about executive pay. (If you're the president, what do you do when the public is worked up about a problem you're pessimistic about fixing? Appoint a czar--which shows you care--and then don't waste another second worrying about it. Anyone remember Albert A. Frink, the rug-maker George W. Bush appointed maunfacturing czar in 2004? Didn't think so.)

But, I have to say, the guy is making the right moves so far.

From today's Journal:

Instead of awarding large cash salaries, Kenneth Feinberg is planning to shift a chunk of an employee's annual salary into stock that cannot be accessed for several years, these people said. ...

Mr. Feinberg is expected to issue by mid-October his determination on compensation packages for 175 of the most-highly compensated executives and employees at the seven firms he oversees. ...

It's not clear what portion of an employee's salary will be diverted to stock but a person familiar with the matter said that in some cases it could be more than 50%. Indeed, Mr. Feinberg employed this strategy in his Oct. 2 ruling on pay for Robert Benmosche, the new chief executive of AIG. Mr. Benmosche's salary was broken into two pieces -- a $3 million annual cash salary and $4 million annually in AIG stock that cannot be accessed for five years.

This sounds like exactly the right idea: Don't fight the overall level of compensation--even if the government is heavily invested in these firms, they still have to compete for talent in a mostly-free global market. But, for a given level of compensation, make sure executives' incentives are aligned with those of shareholders, creditors, and other stakeholders (like the government, which is implicitly on the hook for too-big-too-fail companies). Companies will still claim the restrictions put them at a labor-market disadvantage. But, as Larry Grafstein points out in his piece on post-crisis executive compensation, the employees who'd be deterred by rules against touching stocking for five years probably aren't people you want working for you anyway. So this performs a nice screening function in addition to correctly aligning incentives.

Also, as Larry notes, institutional investors often insist on such provisions when they invest money with private equity funds (for example, they often ask fund-managers to hold a chunk of their gains in escrow for several years before they can withdraw it). In turn, fund managers often insist on such provisions at the companies they invest in. So it's not as though these provisions are alien to the marketplace. To the contrary, they're what you'd expect in a truly free-market system--one where the current gains-are-privatized/losses-are-socialized (aka "heads I win/tails you lose") arrangement wasn't so pervasive.