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Verret Weighs in on Government Plan to Slash Executive Compensation

With The Wall Street Journal's disclosure that U.S. "pay czar" Kenneth Feinberg will halve the average compensation for 175 employees of seven firms receiving substantial government funds through the Troubled Asset Relief Program (TARP), Professor J.W. Verret observes, "There's definitely never been anything like this where a government sets pay for a company that's publicly traded."

Observing that the former Office of Federal Housing Enterprise Oversight in recent years had begun to regulate compensation at government-supported mortgage lenders Fannie Mae and Freddie Mac, which are publicly traded, Verret stressed that those actions included "nothing nearly as heavy-handed as this."

Despite populist calls for executive compensation restrictions, some argue that the restrictions will  encourage talented executives to look for employment opportunities outside the U.S., to which Verret responds, "This is a nickel and dime approach to a billion-dollar problem. This new policy will attract executives who don't have a better alternative, and who don't mind running a business based on political influence."

Verret's comments on the topic were carried in two articles appearing in The Wall Street Journal, as well as in Forbes magazine. Verret also took part in an interview on Patt Morrison's live public affairs show on California's National Public Radio affiliate, Southern California Public Radio. Appearing on the show with Verret were Deborah Solomon, the reporter who broke the story, and Professor William Black of the University of Missouri, Kansas City.

Click on the links below to read the individual stories or listen to the interview:

National Public Radio Interview, October 22, 2009

Pay Czar to Slash Compensation at Seven Firms, The Wall Street Journal, October 22, 2009. By Deborah Solomon and Dan Fitzpatrick.

Pay Czar Moves Represent 'Seismic Shift', The Wall Street Journal (Subscription Required), October 21, 2009. By Joann S. Lublin and Louise Radnofsky.

Pay Czar Readies Knife, Forbes, October 21, 2009. By Brian Wingfield.

Excerpt:

"With some financial firms projected to pay out record bonuses for 2009, the Obama administration is soon expected to slash compensation for bosses at the seven companies that have received the most bailout cash within the past year.

"In the coming days, the Treasury Department's pay czar, Kenneth Feinberg, is expected to announce compensation cuts of about 50% for the 25 highest-paid executives at American International Group ( AIG - news - people ), Bank of America ( BAC - news - people ), Citigroup ( C - news - people ), Chrysler, General Motors and the auto companies' financing arms. Including bonuses, the pay reductions are expected to cut the cash component of salaries by as much as 90% from last year's levels.

"The government is also expected to require changes affecting how these companies' boards of directors set compensation for executives, though details weren't clear. In addition, employees now working in AIG's financial products division, the unit widely blamed for bringing the company to the brink of collapse in 2008, are expected to receive no more than $200,000 in total compensation each. Feinberg had been negotiating with the company to reduce the scheduled $198 million in so-called 'retention awards' employees of the unit are scheduled to be paid next March. (See 'AIG's Pay Fiasco.')

"Executive compensation has been the target of a steady stream of populist outrage ever since the $700 billion Troubled Asset Relief Program was created a year ago. The TARP was meant to bolster the financial system, but recent speculation that some Wall Street firms, such as Goldman Sachs ( GS - news - people ) (which has repaid its TARP obligation), will pay record annual bonuses has caused the pitchforks to come out again. Bad feelings have been exacerbated by a national unemployment rate that is inching toward 10%."


Read additional coverage:

Christian Science Monitor

Chicago Tribune