Pay Czar`s Restriction- Is it Really Going to Result in Talent Poaching?

A friend of mine lost her husband in the unfortunate 9/11 terrorist attack on the World Trade Center. After this tragedy she claimed for the compensation which was offered to the victims of 9/11 attack by US Government. Getting it was quite a complicated and comprehensive process. All the claims had to be reviewed for approval or deny, and the compensation sum, which was paid out of the Treasury had to be calculated. Decision in this case was based on a structured and strict set of criteria. And this is exactly how I heard about Mr. Kenneth Feinberg for the first time. The 9/11 funds involved 3,000 families, who lost a relative at the World Trade Center, in the airplanes, or the Pentagon. It seems that the investigation process for this group of people was quite simple. However, there was also another group of people considered as victims. The later one included those, who survived but suffered after the attack from side-effects such as disfiguration, burn, respiratory illness, etc. Mr. Feinberg spent couple of years on overseeing payouts of around $7 billion to victims of 9/11. I heard in one of the interviews conducted with Mr. Feinberg that he actually personally reviewed every single claim application. And now he comes again as a pay czar with controversial restrictions concerning guidelines for limiting salaries of top executives at companies participating in Troubled Asset Relief Program known as TARP.

TARP and new restriction…

So let`s start from the outset. Financial crisis forced main US companies to take part in TARP. Kenneth Feinberg was delegated to take control over TARP payoffs. After overviewing the payoff procedures and policies of companies participating in TARP, he identified some unacceptable behaviors. For example, the top bailout company- AIG “is scheduled to dole out another $198 million to employees of the financial products unit – largely seen as responsible for the firm’s near failure and bailout – in March 2010”. In this situation he suggested restrictions, which in his opinion will help all those institutions to thrive. As Obama`s administration gave him a mandate to determine appropriate executive pay packages for the 25 top employees at the seven most heavily bailed out companies -AIG, Citigroup, Bank of America, General Motors, Chrysler, Chrysler Financial and GMAC, he had a lot of freedom to suggest relevant actions. Cut-offs made by pay czar are relatively high- according to CNNMoney.com “in October, the pay czar cut total compensation for the top 25 executives at the seven firms by about half, scaling back salaries by 90% and transferring payments into performance-based, longer-term stock options”- Mr. Feinberg is highly convinced that the new restrictions will help companies work properly and give money back to the taxpayers (TARP financed by taxes). As some of the executives among the industry had voluntarily rejected getting any bonuses/compensations, there was a hope that Mr. Feinberg was right and that the restrictions can be implemented smoothly and effectively because executives will take a long term approach and cooperate in order to get even better results in the future. However, the actual scene came out with a different story.

Industry reaction

As the cut-offs made by pay czar are relatively high, restrictions met some resistance among the industry- AIG and Bank Of America were the first to raise informal but strong objections against them . But what was interesting- at the same time automakers such as: General Motors, Chrysler, and Chrysler Financial were much more cooperative. Do you know what the reason for that was? Investigation showed that it seems that “their pay packages were much less than competitive pay at Citigroup or Bank of America.” After the last week board meeting, when Chief Executive Officer of AIG- Robert Benmosche, threatened to resign due the compensation restrictions, institution raised the voice that pay czar`s restrictions will result in nothing else than driving away the human capital, talent poaching and in effect poor management. As a result, executives will shift to the companies, in which operations aren`t covered by the regulations. Institutions claim that it will have an impact on investor’s money because lack of high quality and experienced executives will jeopardize the effectiveness of institutions` key operations.

Mr. Feinberg`s point of view

Since last few days, pay czar`s restrictions- its advantages and possible side-effects, have been a subject of intensive debate. Mr. Feinberg is considered as a strict, self-confident and dedicated person. He is convinced about his decisions and claims that “restrictions on pay at seven top recipients of bank bailout funds were based on fact, cooperative input and evaluating evidence presented to him”. He is also sure that restrictions will not result in talent poaching. He claims that: “for 25 top earners at each of the seven companies, without exception, compensation was too high and not aligned with shareholder interest”. Pay czar is convinced that even if AIG CEO is up to leave the company it doesn`t mean that we will experience massive exodus. He claims that only if one happened, will he review his plans and policies.

Pay czar`s restriction- is it really going to result in talent poaching?

It seems that bailout caused by financial crisis let Government review and get involved in the companies’ internal operations. The question is if it is the only one effective solution to the institutions` financial problems? Passing time will show real results but do you really think that top executives will let themselves to be poached by the competitors? Or it`s just a threat made by the companies such as AIG aimed at forcing the Government to review its strict and harmful for executives` private bank accounts policy? I am looking forward to your opinions.