Though the Treasury Department made a splash Wednesday by unveiling broad principles for curbing executive compensation, it appeared to kick the most critical questions to lawmakers and regulators.
Observers said the new standards, which included a call for legislation to require compensation committees to be independent of management and have adequate resources, are already widely practiced and would not have a significant impact on the industry.
Instead, many said, bankers should be more focused on a hearing scheduled for tomorrow in the House Financial Services Committee to discuss how compensation standards can be reworked as part of a regulatory restructuring to discourage rewarding excessive risk-taking.
Observers are also focused on what steps regulators may take, and they pointed to remarks by Treasury Secretary Tim Geithner that hint at more substantial moves to come.
"I also want to emphasize the importance of the efforts being taken by [Federal Reserve Board Chairman Ben] Bernanke and the bank supervisors to lay out broad standards on compensation that will be more fully integrated into the supervisory process," Geithner said Wednesday at a press conference announcing the new principles. "These efforts recognize that an important component of risk management is getting incentives right, and we will support the Fed and the other regulators as they work to ensure executive and employee compensation practices do not create unnecessary risk."
Geithner did not provide further details, and it remains unclear what regulators are planning. That clearly frustrated some observers, who said the government is making the situation regarding executive pay more uncertain while it attempts to provide clarity.
"It looks like they have a meeting of the governmental minds in the qualitative sense of what are the key executive compensation issues of the day, with the implementation or guidance to come from one or more of the regulators," said J. Mark Poerio, a partner at Paul, Hastings, Janofsky & Walker LLP who focuses on executive compensation.
He somewhat jokingly summed up the government's action this way: "We have a general statement, with more precision to come. But we're just not sure who it's going to come from."
On the legislative side, House Financial Services Committee Chairman Barney Frank said Wednesday that he would seek different steps than those outlined by the Obama administration. He dismissed calls to strengthen the independence of companies' compensation committees, saying in an CNBC interview that such efforts would be "fruitless."
Frank said he wanted to find a way to ensure that pay systems do not encourage risk-taking.
"Pay systems ought be neutral when it comes to risk," he told CNBC. "It shouldn't discourage risk, but it shouldn't incentivize it. We have a situation now where at too many companies, it's heads they win, tails they break even, so they keep flipping the coin."
Frank went further in suggesting that risk takers should lose money if their bets do not pay off. "If people are going to get extra money if they bring extra money in, then they should lose something if they lose money."
His committee will hold a hearing today with representatives from the Fed, the Treasury and the Securities and Exchange Commission and a panel of academics on compensation structures and systemic risk.
The focus of the hearing will be alternative compensation structures that in Frank's view better align the interests of financial services companies and their shareholders.
The hearing is intended to examine how compensation structures contributed to market disruptions in the last year and a half, and to highlight examples of structures that are believed to have encouraged excessive risk-taking.
Also Wednesday, the Treasury unveiled an interim rule implementing a legislative easure restricting executive compensation for Troubled Asset Relief Program recipients.
Under the rule, bonuses would be limited to a third of total compensation for executives and well-paid employees at Tarp recipients. For example, the rule said that for institutions receiving more than $500 million in government assistance, the five most senior executives and the 20 most highly compensated employees would be covered by restrictions.
In addition, the rule would curb "golden parachute" payments to senior officers, and it would impose a clawback on bonuses that were based on "materially inaccurate performance criteria."
The rule also appointed a special czar to oversee compensation at seven companies receiving "exceptional assistance." Kenneth Feinberg, who has previously mediated compensation for families of Sept. 11 victims, was named to the position.
Feinberg's job will be to strike "a sound balance in ensuring that these companies can become competitive … while at the same time being highly accountable … that their funds are not giving exceptional assistance to a company giving inappropriate or excessive salary to its top executives," said Gene Sperling, a special advisor to Geithner.
Such restrictions would apply to the hundreds of banking companies that have received Tarp money, which have become increasingly anxious about how regulators plan to implement rules mandated by Congress in February. Some firms, such as the 10 large ones that announced Tuesday they would repay Tarp funds soon, have been in a hurry to exit the program, because of compensation limits and the threat of additional restrictions.
After meeting with regulators early in the day, Geithner told reporters that the administration supports legislation empowering the SEC to make compensation committees more independent and establishing "say-on-pay" policies giving shareholders nonbinding votes on an executive's compensation.
He also called for broad principles stating, among other things, that compensation "properly measure and reward performance," that it discourage executives from making "immediate gains" while their companies take long-term risks and that it be "aligned with sound risk management."
But observers said those principles are nothing new.
The Treasury "identified areas that have been floating around for awhile," said Steven Hall, a managing director for Steven Hall Partners, an executive compensation consulting company. "They're a little bit late to the party, because some of these things are already taken care of."
Geithner seemed to want to reassure the business community that the administration would not be too prescriptive.
"We do not believe it's appropriate for the government to set caps on compensation," he said. "We are not going to prescribe detailed prescriptive rules."
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