Geithner, Bernanke Want Standards Executive Pay

 

Thursday, Mar 26,2009, 12:19:47 PM   Click:

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WASHINGTON_One could almost hear the page turn.

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

In another time, such a suggestion would have drawn protests from Republicans do not want to interfere with business decisions. And yet the Republicans May draw the line at companies that receive assistance from taxpayers.

But AIG toil and the entire financial sector has opened a seam in the Congress for policy makers to renew a debate on the limitations or conditions of remuneration on executive compensation.

Neither Geithner and Bernanke offered proposals, but the two men echoed the same idea _ linking incentive pay to an institution's long-term success. Compensation would be part of a broad regulatory overhaul should propose Geithner Thursday.

Legislators and the Democratic Obama administration have worked on the outline of a new regulatory regime. Among other things, it would give the government the power to intervene in financial institutions in difficulty, like the Federal Deposit Insurance Corp. can not liquidate failing banks. The changes would also call for an overall authority to help monitor risk by large institutions that are so big they can only harm the hand of the financial system.

Behind the concept of compensation is the belief that many financial institutions to reward them for their leadership in the short term and high risk, gains that have negative long term.

"It is very important that links compensation and reward performance appropriately and, in particular, the fact so as not to encourage excessive risk-taking," Bernanke told the House Financial Services Committee on Tuesday.

Industry observers say that in such a plan, businesses will be encouraged to offer bonuses, incentives and pay with the retention of income deferred, generally as the stock vests after three, four or five years. Financial executives, the thinking goes, therefore, act more cautiously, with an eye toward the future of the institution.

The government could, for example, encourage clearing through the tax code with a combination of incentives and sanctions, according to observers of the private sector.

Geithner made it clear he did not envisage a system that has placed the equivalent of the salary of corporate governance regulation in the conference rooms.

"The government should not be detailed or prescribe detailed regulations to govern the amounts and distribution," he said.

However, the proven by the Financial Crisis May be more conducive to greater government influence on wages.

"The biggest problem with the clearing banks was excessive annual performance driving earnings," said David Wise, who advises companies on compensation issues as a Senior Advisor to the Hay Group, a company management consulting. "Everyone understands that banks need to rebalance their portfolios to put more emphasis on the long term."

For now, the House Financial Services Committee will vote Wednesday on legislation that would prohibit any payment of premiums by companies that have received financial rescue funds until the money is refunded.

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

"You think this should be done across the board with major financial institutions, whether or not they receive federal money?" he asked Bernanke.

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

Republican Rep. Peter King of New York seems to sum up his party dilemma.

"We all agree premiums AIG were wrong," he said. "But how can we protect against that, without going too far?

The financial sector is wary as well. This is not a proposal that would allow shareholders of the company "say on pay" _ a non-binding vote on remuneration. Sage has warned that "say on pay" could cause boards to make decisions based on the compensation to short-term shareholder sentiment rather than the long-term viability.

And Scott Talbott, chief lobbyist of the Financial Services Roundtable, said political leaders and legislators should be wary of a compensation scheme that stifles creativity and the movement of capital.

"You do not want the government setting pay scales," he said, "but rather a framework that the company can adapt to their individual needs."



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