The U.S. pay czar, Kenneth Feinberg, has started a 60-day schedule to review the aptness of the richest pay packages proposed by seven financial firms that received $200 billion in government aid.
Feinberg has started his review on pay packages for 25 of the most highly compensated executives at firms that received substantial support from the Troubled Asset Relief Program (TARP).
The seven firms whose plans will be scrutinized are Citigroup Inc. (C), American International Group Inc. (AIG), Bank of America Corp. (BAC), Chrysler Financial, Chrysler Group LLC, General Motors and GMAC Inc.
On Monday, Feinberg, who has been verifying the submissions since they were due at the Treasury, sent letters to all seven institutions informing them that the pay plans they submitted were deemed substantially complete. The government has laid out general principles that will guide Feinberg’s decisions. Also, the Treasury wants the pay plans to be liberal enough to make the firms profitable in order to repay taxpayer investments by retaining top talented people.
According to government officials, they will partly focus on the pay packages to change the way these are designed. The will also try to give executives long-term incentives to help the company benefit in the long-run.
Bank of America is in the process of partly paying back some TARP funds so it will no longer be considered as an exceptional bailout recipient. It may start with the repayment of $20 billion of additional aid it had received in January to absorb loss making investment bank Merrill Lynch & Co.
In addition to the TARP money, in January the government agreed to absorb a major portion of losses on a $118 billion pool of assets owned by BofA and Merrill. The bank would issue $4 billion in preferred stock to the Treasury carrying an 8% dividend in exchange for this protection. Total cost to the bank for this deal would be about $320 million a year. Also, the bank would pay $236 million to the Federal Reserve.
Citigroup would also look to pay back a $20 billion capital investment it received from the government. It also would need to relax an asset guarantee deal it had with the government, which guarantees limits to losses from a $301 billion pool of its toxic assets.
However, for the other firms the repayment of TARP money is unlikely for a long time as they are in a very difficult situation.
We think that the repayment of government money can be viewed as a sign of recovery of the institutions as well as the economy. Also, the full repayment of government money will enable bailed-out firms from having their executive compensation packages reduced. Restrictions on pay rules as a result of using government money were a major competitive disadvantage for those firms in retaining talented employees.
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