Obama gave a speech back in February wherein he laid out plans to cap the pay and bonuses of executives working for companies who received taxpayer-funded federal bailout money, noting that such executives could still receive compensation (like options) tied to the long-term health of the company. The move was in response to events like the AIG fiasco that occurred after the first round of Bush bailout money.
This week, the Federal Reserve “pay czar” Kenneth Feinberg – hired to oversee the companies who took the bailout money – issued a set of guidelines (The White House likes the term “formula” and “guidelines” better than “pay cap”) aimed to limit the pay at 7 firms who received the most bailout money. The White House ordered what’s being described as “drastic” pay cuts for 175 top executives at these companies, which are: AIG, Citigroup, Bank of America, GM, Chrysler, and the financing departments of the two automakers. However, it’s worth noting that the guidelines don’t specifically prohibit multi-million dollar paychecks or substantial deferred compensation.
Said Obama in a speech, “I’ve always believed that our system of free enterprise works best when it rewards hard work. But it does offend our values when executives of big financial firms — firms that are struggling — pay themselves huge bonuses even as they continue to rely on taxpayer assistance to stay afloat.”
The Fed also noted that it would begin reviewing compensation practices at some our largest largest financial firms. In its guidelines the Fed stated, “Banking organizations too often rewarded employees for increasing the firm’s revenue or short-term profit without adequate recognition of the risks the employees’ activities posed to the firm.”
The Fed also noted that the hope is for other banking institutions to adopt the “pay cut model” in an effort to focus on long-term profitability and stability, rather than short-term cash.