Barack Obama to Order Salary Cuts at Bailed-Out Firms
President Obama's 'pay tsar' looks to curb boardroom excess • Executive packages to fall by 50% on average
The US government is preparing to order bailed-out banks and car companies to slash the cash salaries of their top executives by an average of 90% in an effort to quell outrage over multimillion-dollar boardroom excess.
Kenneth Feinberg, the US treasury's so-called pay tsar charged with vetting remuneration, intends to tell seven struggling firms still dependant on taxpayer dollars that their 25 highest-paid executives must accept severe year-on-year cuts. The biggest drops will be in salaries. But after taking into account bonuses, stock options and other elements, total pay packages are set to fall by an average of about 50%.
Feinberg's power only extends to companies that are yet to repay government aid. The firms concerned include the struggling banks Citigroup and Bank of America, plus the insurer AIG.
Also on the list are the Detroit car manufacturers General Motors and Chrysler, and the car companies' financing arms, Chrysler Financial and GMAC.
A mediation specialist formerly responsible for settling compensation claims for victims of the September 11 terrorist attacks, Feinberg has spent the last two months scrutinising pay proposals submitted by bailed-out businesses. His findings, due to be formally released within the next week, were leaked to US media yesterday.
Several individuals have already acquiesced to Feinberg's will. Bank of America's soon to retire chief executive, Ken Lewis, last week announced that he will forgo his $1.5m (£900,000) salary this year, under pressure from Feinberg.
Other ordinances will require any "frills" worth more than $25,000, such as country club membership, limousines or private aircraft, to be subject to government approval. And Feinberg is likely to insist on a division between the roles of chairman and chief executive.
Speaking at a conference on Tuesday, Feinberg suggested that he faced an almost impossible task in pleasing everybody: "The incredible gap, the chasm, between Wall Street perceptions and main street perceptions, is a formidable chasm that I'm not sure can be bridged, although the law requires me to bridge that chasm."
Most of Wall Street's top earning institutions, including Goldman Sachs and JP Morgan, will escape the crackdown as they have repaid government aid. But AIG has been ordered to make good on its promise to cut back $198m of bonuses paid to staff at its financial products division, which sparked Congressional fury and death threats to certain executives involved.
The cuts, however, may not be as uniformly deep as they sound. Some top individuals have already given up virtually all of their pay, skewing the average reduction. For example, Citigroup's chief executive, Vikram Pandit, has committed himself to working for a salary of $1 until the bank returns to health. And in an effort to head off controversy, Citigroup is selling an energy trading arm, Phibro, where British-born star trader Andrew Hall is in line for a bonus of nearly $100m.
Mitch McConnell, the Republican leader in the US senate, said government intervention was inevitable, given the amount of money committed to bailout efforts: "If the federal government is a partner, in effect, in these companies, then it ought to have some say on compensation."
But Wall Street, banks and Republicans have vigorously opposed any moves by the Obama administration to go further by enforcing pay restrictions at banks operating without government aid.
Feinberg's move against top corporate pay came as Obama's former "car tsar" attacked the "stunningly poor management" he encountered at Detroit's carmakers as he worked to avert a collapse of the biggest US auto firms this year.
Steve Rattner, a former private equity executive, was the treasury secretary Timothy Geithner's top adviser on the car industry between February and July - when the US government acted to rescue both General Motors and Chrysler.
In an article for Fortune magazine, Rattner offered a savage verdict on the leadership culture at the industrial giants, singling out GM's former boss Rick Wagoner for his "friendly arrogance", and top executives' reluctance to mix with workers.
"Everyone knew Detroit's reputation for insular, slow-moving cultures," he said. "Even by that low standard, I was shocked by the stunningly poor management we found, particularly at GM, where we encountered, among other things, perhaps the weakest finance operation any of us had ever seen in a major company."
Rattner attacked GM's top executives for sequestering themselves on the top floor of the Renaissance Centre skyscraper in Detroit, with exclusive lifts, to avoid mixing with lower-ranking "drones".
In March, the White House forced Wagoner to step down as a condition for more funding to keep GM afloat. Rattner accused him of blaming everyone else for the company's difficulties. "Rick set a tone of 'friendly arrogance' that seemed to permeate the organisation," he said.