An up and coming Wall Street executive might want to hold off on buying that condo in Aspen. The Obama administration is ready to issue broad new guidelines that would rein in pay at financial institutions.
Eager to remove incentives that they say contributed to last year’s financial crisis, President Barack Obama’s economic team plans to unfurl broad executive pay principles, possibly as early as Wednesday, that put a premium on long-term performance over short-term gain.
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke want to give the Fed, which regulates banks, and the Securities and Exchange Commission, which oversees the financial markets, greater powers to guide compensation practices on Wall Street and beyond.
In anticipation of the new guidelines, Geithner scheduled a private meeting Wednesday with SEC Chairwoman Mary Schapiro, Federal Reserve Governor Dan Tarullo and executive pay experts to discuss compensation policies.
Those overarching guidelines for the industry come as the administration prepares to issue new, more specific regulations governing pay at financial institutions that have received infusions from the $700 billion Troubled Asset Relief Program. The regulations, prompted by legislation passed by Congress earlier this year, would limit top executives to bonuses no greater than one-third of their annual salaries.
Those regulations, expected later in the week, would replace administration restrictions on banks that receive "exceptional assistance" from the government. Those limits set a $500,000 cap on pay for top executives and limited bonuses or additional compensation to restricted stock that could only be claimed after the firm had paid the government back.
On Tuesday, 10 of the nation’s largest banks got permission to pay back their share of the money, just in time to avoid the new pay regulations. But executives at several other high-profile firms, including Citigroup, Bank of America, the American International Group, Chrysler and General Motors, would fall under the new bonus limits.
Executive pay is a politically charged issue. Bonuses totaling $165 million issued by AIG in March set off a public and congressional outcry.
Obama and his economic team have been trying to temper the populist urge to cap salaries while at the same time trying to make the case that compensation practices contributed to the current crisis by encouraging high risk taking.
"I think boards of directors did not do a good job," Geithner said Tuesday. "I think shareholders did not do a good job in terms of discipline and compensation practices."
Geithner has described a system whereby compensation would be based on long-term performance, thus reducing incentives to engage in practices that could have immediate gains but disastrous consequences over time. Gene Sperling, a counselor to Geithner, is scheduled to make that argument when he testifies Thursday about compensation practices before the House Financial Services Committee.
The financial sector has been pushing back, arguing that restrictions that are too stringent could dampen innovation and drive professional talent to foreign firms that don’t face compensation limits.
"This is the opening of Pandora’s box," said Tom Quaadman, an expert on financial institutions at the U.S. Chamber of Commerce.
It was unclear Tuesday how much of its executive pay package the administration planned to detail this week and how much it would include in a broader list of regulatory proposals that Obama will announce next week.
"A centerpiece of sensible reforms will be to tie compensation to better measures of long-term investment and return and to adjust them to reflect the risk," Geithner told a Senate appropriations subcommittee Tuesday.
Sen. Frank Lautenberg, D-N.J., encouraged Geithner to act. "We’ve got to change corporate culture that says the leadership at the top can often take its compensation without regard for what happens with the employees or the future investing or the well-being of the company and taxpayers," he said.
In a brief interview, Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, drew a distinction between companies that receive government funds and those that do not.
The government, he said, should not intrude in the compensation practices of companies where there is no government involvement.
"There, the board of directors have an obligation to the shareholders," he said. "Where there is a government involvement, like TARP, that’s a different story."
The TARP-related regulations stem from legislation Sen. Chris Dodd, D-Conn., inserted as an amendment to the economic stimulus package earlier this year. Among its provisions, it requires the treasury secretary to seek reimbursement of any compensation paid to a TARP recipient’s top 25 employees if Treasury deems the payments contrary to the public interest.
The administration plans to retain Kenneth R. Feinberg, a lawyer who oversaw payments to families of victims of the Sept. 11, 2001, terrorist attacks, to oversee company compensation plans.
AP Economics Writer Martin Crutsinger contributed to this report.