The Special Master of Compensation

Kenneth Feinberg, the "Special Master for TARP Executive Compensation" at the Treasury Department (aka Pay Czar), recently testified before the House Committee on Oversight and Government Reform. Most of his actions seem reasonable and defensible if you accept the premise that the government has the right to limit compensation at companies that accepted TARP bailouts. His justification for limiting executive compensation includes the following:

"1. The companies requested excessive guaranteed cash - salaries and bonuses - for company executives; 2. The companies requested that stock issued to these executives be either immediately redeemable or redeemable without a sufficient waiting period; 3. Many of the companies did not sufficiently tie compensation to performance-based benchmarks and metrics; 4. Many of the companies did not sufficiently limit or restrict financial "perks," such as private airplane transportation, country club dues, golf outings, etc., and in some cases provided excessive levels of severance and executive retirement benefits; 5. The companies did not make sufficient effort to fold guaranteed compensation contracts - entered into prior to the enactment of the current compensation regulations - into 2009 performance-based compensation."

And these are the actions he took:

"1. I greatly reduced the amount of 2009 guaranteed cash compensation made available to senior executives. On the whole, cash (which, in the past, included cash base salaries and cash bonuses) was reduced by approximately 90%. Overall total compensation was reduced by approximately 50%.

2. In place of cash, I substituted "stock salary" which, in accordance with Treasury regulations, vests immediately upon issuance but may only be redeemed in three equal, annual installments beginning in 2011, with each installment redeemable one year early if TARP obligations are repaid. The objectives are clear - to tie individual compensation to longer-term performance metrics, and to encourage senior executives to remain at the company for a period of years to maximize their personal benefit from the overall profitability of the company itself. The value of "stock salary" will depend on the companies' financial success in coming years. At the same time, I also permitted incentive payments of "long-term restricted stock." This long-term incentive stock vests only if executives remain employed for three years after grant, and it can be cashed in only in 25% increments for each 25% of TARP obligations repaid by their employer. Again, the goal is to tie individual compensation to the overall financial success of the company.

3. By implementing the ideas of "stock salary" and "long-term restricted stock," only redeemable after multiple years of company performance, I tied individual compensation to long-term company success.

4. I reined in "perks" by expressly requiring that any such perks beyond $25,000 per individual must first receive the approval of the Office of the Special Master. No longer will senior executives be entitled to excessive use of private planes and other compensation-related financial benefits.
I also prohibited additional company contributions to executive retirement programs..

5. I succeeded in almost all cases in getting the companies to agree to restructure guaranteed contracts and other forms of guaranteed compensation into prospective, performance-based compensation packages. These companies agreed, in almost all cases, to transfer guaranteed forms of compensation - entered into with company officials before the enactment of current legal requirements - into "stock salary."
I am very reluctant to even attempt to invalidate the sanctity of contracts entered into well before enactment of the current law; however, I did work closely with the companies in an attempt, cooperatively, to restructure these "grandfathered" financial guarantees by making them part of my 2009 final compensation determinations."

Feinberg also wisely advised that his powers, and the federal government's, not be expanded to companies beyond the seven (GM, GMAC, Chrysler, Chrysler Financial, BoA, Citigroup, AIG) that accepted TARP funds nor past the time necessary to repay taxpayer monies. His full written statement can be seen here.