President Barack Obama's compensation czar has been meeting for weeks with executives at some of the country's largest and most troubled companies as they face a Thursday deadline to propose how much they will pay their top employees.
Kenneth R. Feinberg has the unprecedented task of deciding executive compensation at seven companies that received large government bailouts. His meetings with American International Group, Citigroup, Bank of America, General Motors, Chrysler, Chrysler Financial and GMAC have been conducted in secret, with neither Feinberg nor the companies willing to say much in public.
Last month, Feinberg's face flashed across the video screens at corporate offices in London, Paris and Wilton, Conn. Over the better part of an hour, AIG employees on both sides of the Atlantic peppered him with questions about their compensation, recalled several people familiar with the videoconference. What could happen to the bonuses they were promised? Would he try to alter their contracts? How would the company's pay structure change?
Some of AIG's highest earners work in these offices, which are home to its financial products division. In March, the division's employees were paid $165 million in retention bonuses, triggering national outrage. More than $200 million more in bonuses are scheduled to come due in 2010.
Feinberg, who has sole discretion to set compensation for the top 25 employees of each of those companies, has 60 days to make a determination after the proposals are complete. Under the administration's initiative to curb excessive pay practices, each of the seven companies must also receive his approval for how it pays the rest of its 100 most highly compensated executives and employees. The companies must submit pay plans for these employees by Oct. 12.
With Congress and the public already exasperated by the hefty pay awarded to Wall Street bankers, Feinberg is under intense pressure to put checks on excessive pay. But if he goes too far, the companies he oversees could lose their rainmakers and other key executives to rival firms that are not subject to similar pay restrictions.
"I wish I could hum the theme song for 'Mission Impossible' because I think his job is mission impossible," said Robert Profusek, a lawyer at Jones Day who has advised major banks on compensation matters. "On the one hand, there's this populist outrage that is fanned every other day by somebody in Washington. ... But he can't just go in there with a hatchet and cut everything because the good people will leave. That's not in our best interest" as taxpayers.
During the videoconference with AIG employees, Feinberg mostly avoided giving them detailed answers to their questions. Many of the employees left frustrated because he gave them no sense of whether he would seek to modify contracts that promise them upcoming bonuses, said people familiar with the session.
Legally, Feinberg cannot prohibit bonuses that were promised before the February passage of the stimulus bill, which included new compensation restrictions for companies receiving government rescue funds. That includes, for example, retention payments to AIG employees. He could try to renegotiate those bonuses if he thinks they're against the public interest, according to the rules on new compensation.
He could also take these bonuses into account when evaluating an employee's overall compensation package. For example, if a company proposes giving an executive $1 million in compensation on top of a $500,000 bonus due later this year, Feinberg could subtract the $500,000 from the proposed pay package, in effect negating the bonus.
Even for Feinberg, who oversaw the complex process of paying compensation to victims of the Sept. 11, 2001, attacks, this latest mission is a delicate balancing act.
Senior Treasury Department officials say they do not want Feinberg to set precise prescriptions for how companies compensate employees. Instead, his task is to evaluate pay according to several principles. For instance, does an employee's compensation reward short-term, risky business behavior? Or, on the contrary, is the compensation tied to longer-term performance goals? Does it allow the company to remain competitive and recruit top talent?
Already, banks such as Goldman Sachs, which recently returned its bailout funds to the government, have set aside enough money that they could resume paying year-end bonuses on the same scale as they did before the financial crisis. That has boosted Citigroup and Bank of America's argument that they must be free to keep their pay competitive.
Further complicating Feinberg's mission is the assortment of companies under his watch. They include banks, financing firms and automakers, and each industry traditionally pays its executives differently. For each company, he will have to assess the role individual employees play and their ability to generate revenue.
During their discussions, Feinberg has yet to provide executives with a clear sense of how he plans to evaluate their pay proposals. While the pay packages will become public information, the companies have been reluctant to divulge details as they're negotiating with Feinberg.
On Thursday, Feinberg should have seven proposals on his desk, each with its own set of potential landmines.
"You've got to allow these companies to make the money for the shareholders," said Linda Rappaport, head of the executive compensation practice at the firm Shearman & Sterling. "And to make the money for the shareholders, they have to have the talent, and to have the talent, they have to be able to pay them competitively."