Treasury Secretary Timothy Geithner described a series of reforms that the Obama administration wants to make to executive compensation practices, including support for say-on-pay legislation that would give investors more input into executive pay packages at public companies.
Geithner said he had met with SEC Chair Mary Schapiro, Federal Reserve Governor Dan Tarullo and other officials to find ways to better align pay with performance. However, he emphasized that the administration did not intend to cap salaries. Instead, executives will be subject to congressionally imposed limits on bonuses, particularly at companies that have been heavy recipients of government bailout money and have not yet repaid the funds.
Still, Geithner emphasized that the administration needed to curb the more abusive pay practices that contributed to the recession. This financial crisis had many significant causes, but executive compensation practices were a contributing factor, said Geithner. Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage.
The reforms will be based on several principles, including the idea that compensation plans should properly measure and reward performance, and that compensation should be structured to account for the time horizon of risks.
Incentive-based pay can be undermined by compensation practices that set the performance bar too low, or that rely on benchmarks that trigger bonuses even when a firms performance is subpar relative to its peers, said Geithner. He added that some of the decisions that contributed to the financial crisis occurred when people were able to earn immediate gains without their compensation reflecting the long-term risks they were taking for their companies and their shareholders.
He wants compensation to be aligned with sound risk management and to reexamine controversial practices such as golden parachutes and supplemental retirement packages. Geithner also intends to promote transparency and accountability in setting compensation.
Among the measures the administration called for is legislation from Congress that would give shareholders non-binding annual say-on-pay votes at all public companies. The administration also wants to see legislation that would give compensation committees on company boards greater independence. Rules would require that members of the compensation committee meet new independence standards similar to those of audit committees under Sarbanes-Oxley.
The Treasury also released a set of interim final compensation rules for firms that have received funds from the Troubled Asset Relief Program, including limits on bonus payments for some executives and highly compensated employees, the curtailment of golden parachute payments, and a clawback for any bonus based on materially inaccurate performance criteria. In addition, a special master would be appointed to review compensation plans at firms receiving exceptional assistance. The special master would have to approve the compensation structure for any executive officers and the 100 most highly paid employees at the firms.
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