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Repercussions of Regulations
It's clear the TARP-related regulations are stirring up the talent pools at the bailout institutions, but will the executive-comp restrictions have an impact on other employers and industries? Such organizations may not cut pay for their own executives, but the regulations may affect the future structure of compensation programs.
As the Obama administration, via both the Treasury Department and the Federal Reserve, tighten up executive compensation and related pay structures, the repercussions are widespread. On the talent front, it's no surprise that just the potential of deep pay cuts has caused some highly paid executives to look for greener pastures. But even as many financial organizations not bound by new federal regulations attempt to lower costs, it's unlikely they will co-opt federal rules as a way to lower their own compensation limits. The most dramatic TARP-related compensation changes came recently from Kenneth Feinberg, the Treasury's special master on compensation. At the White House's request, Feinberg evaluated pay packages for 25 of the most highly compensated executives at each of seven firms receiving large amounts of tax dollars through the Troubled Asset Relief Program. Reports are that the plan will reduce total compensation this year by about 50 percent, on average. At the same time, the Federal Reserve announced it would police banks' pay policies to ensure they don't encourage employees to take reckless actions, primarily the type that contributed to the financial crisis. The Fed's proposal would cover thousands of banks, including many that never received a TARP bailout. Rather than setting compensation levels, the Fed will review -- and can nix -- pay policies that might cause excessive risk-taking by executives, traders or loan officers. TARP-induced caps will not creep into "Main Street" employers, says Jeff Ott, a partner at Warner Norcross & Judd LLP, a Michigan-based law firm, who concentrates on banking law, and works extensively with public companies. Companies that need the talent most right now would be handicapped if they followed this lead, he says. He is seeing a trend among banks, whether they took TARP money or not, however, to examine salaries, he says. The pay-cut restrictions are really not an issue among employers in the banking industry overall because most banks are local and regional, and typically don't pay high compensation to top executives in the first place, he says. "The market will always determine pay level," he says. "When you have a non-market force trying to impose an arbitrary number on the market, it would really limit hiring the best talent." Scott Olsen, principal in the HR services practice in the New York office of PricewaterhouseCoopers, says the Obama administration's TARP-related actions may have an impact on the future "structure" of compensation programs -- including increased deferral percentages, longer time horizons, and process and governance improvements to the pay-determination process -- but not on pay levels directly. "It's somewhat doubtful that the broader TARP limits will drive compensation of high-performing front-office personnel down, as there will continue to be strong competition for employees and executives that can drive future growth and profitability for these businesses," he says. In the case of the Fed's plan, he says, its intent is clearly to spur the industry as a whole to adopt certain principles around executive compensation. "The impact across the industry will depend on the starting point of individual companies, compared to the Fed principles," Olsen says, noting that some companies' current programs and processes may be closer to compliance with the Fed's principles than others. Irv Becker, national practice leader for the executive compensation practice at Hay Group, an HR consulting firm based in Philadelphia, says that caps on pay will further skew the playing field in favor of the non-TARP institutions. "It's going to make it even harder for the affected organizations to compete and ultimately repay taxpayers," he says. As such, Becker says, it makes little sense for non-TARP companies to put restrictions on pay in place. In fact, he says, these new plans may cause such firms to change their compensation programs to provide even more compensation to rising executives, to ensure they're set from a wealth-accumulation perspective before even getting to the top jobs. "If I were advising one of the non-TARP companies, I would say to step back and make sure you evaluate your compensation plan and stay away from knee-jerk reactions," he says. "It is important for all employers to determine what makes sense for their business segments." At the same time, Becker says that all the recent focus on executive compensation means that it is a good time to ensure that compensation plans really are based on performance. "Clearly, focusing on deferrals and time horizons is a good thing," he says. "It is important that compensation aligns well with the performance of a company. If you don't have the proper pay mix, there are some lessons learned here. But voluntarily reducing salary to a set amount and stock is too arbitrary, and not in a company's best interest." Becker says it's clear that a company can't reward poor performance, a "pay for failure" approach. But most companies don't have that right now. The critical issue is the "time horizon of risk" issue, so if performance turns poor, a company can recoup some of the compensation. One way the TARP cuts could have an eventual impact on talent is if they spill over to the Securities and Exchange Commission regulations, so that public companies would be required to include "say on pay" as an item for action at shareholder meetings, Ott says. Say-on-pay allows a public company's shareholders to have a non-binding vote on executive compensation. "If anything might bleed over from the TARP situation, it may be the say-on-pay issue," Ott says. And that could give privately held companies an even greater advantage in recruiting and hiring top talent, since they do not have to answer to the SEC, he says.
November 5, 2009 Copyright 2009© LRP Publications |
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