WASHINGTON — The Treasury Department on Thursday ordered seven companies that received billions of dollars in government bailouts to halve total compensation for their top executives. But the big reductions will not apply to pay earned before November.
Kenneth Feinberg, the Treasury official leading the pay review, told reporters that average salaries for the top 25 executives are being cut 90 percent starting next month.
The action will apply to the top executives at Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial.
Meanwhile, the Federal Reserve unveiled a proposal Thursday that for the first time would police banks' pay policies to ensure they don't encourage employees to take reckless gambles such as those that contributed to the financial crisis.
Unlike the Treasury plan, the Fed proposal would cover thousands of banks, including many that never received a bailout. But the central bank would not actually set compensation. Instead, the Fed would review — and could veto — pay policies that could cause too much risk-taking by executives, traders or loan officers.
The government did not want to make executives return compensation already received this year, but the reduced pay levels will be the base for making decisions on salary in 2010, Feinberg said.
The executives will still be subject to compensation limits as long as their companies are receiving support from the government's $700 billion bailout fund. Their total compensation was being cut in half, on average.
Cash salaries will be limited to $500,000 for more than 90 percent of affected employees. Personal expenses for such perks as company autos and corporate jets will be capped at $25,000 without approval from Feinberg's office.
Feinberg got the job as pay czar earlier this year when Congress, responding to outrage about huge bonuses being paid to AIG, amended the bailout law to require limits on executive compensation at companies getting exceptional assistance.
"I am extremely sensitive to the public outrage," Feinberg said, adding that his decisions were made without any input from the Obama administration.
Feinberg began reviewing the compensation packages in August and described his discussions with the companies as "intense." Under the law, the companies' only avenue of appeal is to request that Feinberg review his own decisions.
Bank of America complained that the pay restrictions would hurt its ability to retain top employees.
"Competitors not subject to the pay restrictions already are exploiting this situation by identifying our top performers and using pay concerns to recruit them away," said Bank of America spokesman Scott Silvestri.
Citigroup said it was pleased the decision had been issued and that it will "work to comply with the plan's requirements."
Speaking earlier at the White House, President Barack Obama welcomed the decision and said Americans' values are offended by excessive paychecks for executives whose companies were bailed out by taxpayers. He urged Congress to pass legislation to give shareholders a voice in executive pay packages.
"It does offend our values when executives of big financial firms that are struggling pay themselves huge bonuses even as they rely on extraordinary assistance to stay afloat," Obama said.
Treasury Secretary Timothy Geithner also praised the outcome of Feinberg's deliberations.
"We gave him the difficult task of cutting excessive pay, striking a balance between compensation and risk taking and keeping strong management teams in place to help the companies recover — all in the public interest," Geithner said in a statement.
Smaller companies and those that have repaid the bailout money, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., are not affected by the plan.
Feinberg restructured the pay packages for top executives to provide a base salary and a portion described as "stock salary." The employees will be required to hold the stock for two years and then can only sell one-third of the stock payment each year for three years.
A third category, called "long-term restricted stock," is not guaranteed. This category can only be paid to an employee once a company has repaid its bailout money. Feinberg said his goal was to tie compensation more closely to the long-term performance of the company.
In one pay plan approved by Feinberg, the three highest earners at Citigroup will receive a base salary of $475,000. Each executive also will be paid between $5.6 million and $5.8 million in company stock to be redeemed beginning in 2011. The third category of long-term restricted stock will equal $3 million for each executive.
GM said in a statement that it will adopt the compensation changes outlined by Feinberg by shifting its pay packages toward noncash compensation that is tied to company performance.
"Along with restoring GM to profitability, a key priority is responsible stewardship of the public investment in our company and rapid repayment of that investment," the automaker said.
Chrysler Group LLC CEO Sergio Marchionne and other Fiat executives who work for both Chrysler and Fiat were exempted from the pay cuts as part of the U.S. government's agreement with Fiat.
Executives who work solely for Chrysler could be affected, but many of the top earners under Chrysler's former owner have left the company, including former CEO Robert Nardelli and former Vice Chairman Tom LaSorda. Deputy CEO Jim Press also is about to leave the company.
Under the Fed proposal, the 28 biggest banks would develop their own plans to make sure compensation doesn't spur undue risk taking. If the Fed approves, the plan would be adopted and bank supervisors would monitor compliance.
At smaller banks — where compensation is typically less — Fed supervisors will conduct reviews. Those banks don't have to submit plans.
The Fed refused to identify the 28 banks that will have to submit plans. Nearly 6,000 banks regulated by the Fed would be covered.
"The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system," said Fed Chairman Ben Bernanke.
In the AIG trading division, the arm of the company whose risky trades caused its downfall, no top executive will receive more than $200,000 in total compensation for 2009. However, the issue of $198 million in bonuses that are to be paid to employees of the trading unit in 2010 still must be determined. The government has said it will push to see those bonuses reduced.
The giant insurance company has received taxpayer assistance valued at more than $180 billion. An AIG spokesman declined to comment Thursday.
The pay restrictions for all seven companies will require any executive seeking more than $25,000 in special benefits — things such as country club memberships, private planes and company cars — to get permission for those perks from the government.
Feinberg's decisions come days after administration officials voiced sharp criticism of plans by some firms, particularly those on Wall Street, to pay huge bonuses even as the country continues to struggle with rising unemployment and the effects of the recession.
Goldman Sachs, which has paid back its bailout money, has said it earmarked $16.7 billion for compensation so far this year — more than $500,000 per employee. Citigroup is paying $5.3 billion in bonuses to its employees, and Bank of America is paying $3.3 billion.
Elsewhere, Freddie Mac is giving its chief financial officer compensation worth as much as $5.5 million, including a $2 million signing bonus. The government-controlled mortgage finance company doesn't have to follow the executive compensation rules because it is being paid outside the Troubled Asset Relief Program.