Pay Czar`s Restriction- Is it Really Going to Result in Talent Poaching?

Updated: November 23, 2009

TARP and new restriction…

So let`s start from the outset. Financial crisis forced main US companies to take part in TARP. Kenneth Feinberg was delegated to take control over TARP payoffs. After overviewing the payoff procedures and policies of companies participating in TARP, he identified some unacceptable behaviors. For example, the top bailout company- AIG "is scheduled to dole out another $198 million to employees of the financial products unit - largely seen as responsible for the firm's near failure and bailout - in March 2010". In this situation he suggested restrictions, which in his opinion will help all those institutions to thrive. As Obama`s administration gave him a mandate to determine appropriate executive pay packages for the 25 top employees at the seven most heavily bailed out companies -AIG, Citigroup, Bank of America, General Motors, Chrysler, Chrysler Financial and GMAC, he had a lot of freedom to suggest relevant actions. Cut-offs made by pay czar are relatively high- according to "in October, the pay czar cut total compensation for the top 25 executives at the seven firms by about half, scaling back salaries by 90% and transferring payments into performance-based, longer-term stock options"- Mr. Feinberg is highly convinced that the new restrictions will help companies work properly and give money back to the taxpayers (TARP financed by taxes). As some of the executives among the industry had voluntarily rejected getting any bonuses/compensations, there was a hope that Mr. Feinberg was right and that the restrictions can be implemented smoothly and effectively because executives will take a long term approach and cooperate in order to get even better results in the future. However, the actual scene came out with a different story.

Industry reaction

As the cut-offs made by pay czar are relatively high, restrictions met some resistance among the industry- AIG and Bank Of America were the first to raise informal but strong objections against them . But what was interesting- at the same time automakers such as: General Motors, Chrysler, and Chrysler Financial were much more cooperative. Do you know what the reason for that was? Investigation showed that it seems that "their pay packages were much less than competitive pay at Citigroup or Bank of America." After the last week board meeting, when Chief Executive Officer of AIG- Robert Benmosche, threatened to resign due the compensation restrictions, institution raised the voice that pay czar`s restrictions will result in nothing else than driving away the human capital, talent poaching and in effect poor management. As a result, executives will shift to the companies, in which operations aren`t covered by the regulations. Institutions claim that it will have an impact on investor's money because lack of high quality and experienced executives will jeopardize the effectiveness of institutions` key operations.

Mr. Feinberg`s point of view

Since last few days, pay czar`s restrictions- its advantages and possible side-effects, have been a subject of intensive debate. Mr. Feinberg is considered as a strict, self-confident and dedicated person. He is convinced about his decisions and claims that "restrictions on pay at seven top recipients of bank bailout funds were based on fact, cooperative input and evaluating evidence presented to him". He is also sure that restrictions will not result in talent poaching. He claims that: "for 25 top earners at each of the seven companies, without exception, compensation was too high and not aligned with shareholder interest". Pay czar is convinced that even if AIG CEO is up to leave the company it doesn`t mean that we will experience massive exodus. He claims that only if one happened, will he review his plans and policies.

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