LETTER FROM U.S.A.

Towards a Fair Economy?

IDN Global Economy Desk

You cannot have the best of both worlds: be bailed out at taxpayer's cost and at the same time claim huge compensation packages. Such an attitude is devoid of all fairness and will no longer be tolerated. This is the upshot of a new legislation awaiting its passage through the U.S. Senate.

Julia Coym, a political analyst at London-based Maplecroft, the leading source of global risks intelligence, explains what it is all about.

The U.S. House of Representatives on July 31 voted 237 to 185 in favour of a bill tightening regulation on the compensation packages given to high level employees and executives at large financial institutions. The Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) is the most recent government initiative in reaction to the public outrage at large bonuses being paid at bailed out companies.

The legislation, which still needs to be approved by the U.S. Senate, includes four main components.

First, shareholders of major financial institutions must now carry out a non-binding vote on the level of executive compensation as well as on compensation features such as golden parachutes, acronym for generous termination benefits for executives.

However, the U.S. Securities and Exchange Commission (SEC) can exempt certain groups of companies from the requirement, specifically to avoid encumbering smaller companies through new regulations.

SEC's mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, SEC considers its investor protection mission "more compelling than ever".

The second component of the H.R. 3269 bill is increased independence in company compensation committees. Compensation consultants must qualify as independent, measured against criteria still to be created by the SEC.

Moreover, company directors who sit on compensation committees are not allowed to “accept any consulting, advisory, or other compensatory fee from the issuer”, although the SEC can allow for exemptions in this case also.

Third, all financial institutions that have over US$1bn in assets are now required to report how they structure incentive-based compensation packages. Regulators will then have the right to determine whether the incentives promote excessive risk-taking.

Lastly, the bill charges the Government Accountability Office (GAO) with researching the links between executive compensation packages and risk-taking practices.

Meanwhile Kenneth Feinberg, appointed as the White House’s pay czar following public outrage at compensation levels this June, is looking into seven companies that have benefited at least twice from federal bailout money.

The companies, which include Bank of America, Citigroup, AIG, GMAC, GM, Chrysler and Chrysler Financial, must submit compensation reports to Feinberg for the 25 highest paid employees by August 13. Feinberg can then adjust the pay of any individual on that list before mid-October. After that, Feinberg can alter the pay of the remaining top 100 earners by general formulas.

Both the government and the affected companies have been careful in their statements on the compensation issue. Feinberg has been vague about the exact measures he is likely to take after companies have submitted their reports. The government hopes that companies will voluntarily alter compensation packages and bonus guarantees before Feinberg reviews pay packages.

Many banks have argued that bonus guarantees are necessary in order for them to remain competitive in terms of acquiring much needed new talent. Legally, the bonuses promised before the passage of compensation restrictions in February’s stimulus bill cannot be reversed or prohibited.

However, Feinberg could reduce other parts of compensation packages if bonus guarantees are not altered. Banks that have repaid bailout money are not bound by any restrictions and have also resumed the practice of offering guarantees.

The seven companies currently being scrutinized by Feinberg have said they are trying to work with the government to reach mutually beneficial outcomes. However, the kind of compromise on pay reached between the companies and the government will depend in large part on the level of public interest and anger when decisions are made in the later part of this year.

Feinberg was appointed by the Obama administration on June 10 as compensation overseer with broad discretion to set the pay for 175 top executives at seven of the nation's largest companies, which have received hundreds of billions of dollars in federal assistance to survive.

Feinberg is a well-known Washington lawyer and mediator whose last high-profile assignment was putting a financial value on the lives of victims of the 9/11 attack.