In Bailout Furor, Wall Street Pay Becomes a Target
Congress wants Wall Street to feel it where it hurts: the wallet.
The stratospheric pay packages of Wall Street executives have become a lightning rod issue as Congress shapes a $700 billion bailout for financial firms. Proposals circulating on Capitol Hill vary, but they all would impose some limits or approval authority on salaries of executives whose firms seek help.
The moves in Washington mirror the popular outcry — in constituent e-mail messages and postings in the blogosphere — over the prospect of Wall Street's tarnished titans walking away with tens of millions of dollars a year while taxpayers pick up the bill.
But Wall Street, its lobbyists and trade groups are waging a feverish lobbying campaign to try to fight compensation curbs. Pay restrictions, they say, would sap incentives to hard work and innovation, and hurt the financial sector and the American economy.
"We support the bill, but we are opposed to provisions on executive pay," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, a trade group. "It is not appropriate for government to be setting the salaries of executives."
Yet some formal restraint on executive pay seems unavoidable, even sensible, some finance experts and economists said.
Arthur Levitt Jr., a former Wall Street executive as well as a former chairman of the Securities and Exchange Commission, said pay curbs on executives whose firms take part in the bailout were essential for Congressional approval and were reasonable.
The finance industry, Mr. Levitt added, will continue to offer handsome salaries for the successful, though not as high as in the boom years. "The golden egg has disappeared," he said.
Scott A. Shay, chairman of Signature Bank, which holds no high-risk securities, called a limit on executive pay for firms participating in the bailout only fair.
"If that doesn't happen, you are effectively advantaging the institutions that made those risky bets at taxpayers' cost," Mr. Shay said. "What sense does that make?"
Across the Atlantic, there is also an appetite for stepping into pay practices in the finance industry. This week, Prime Minister Gordon Brown of Britain called "unacceptable" the practice of linking bonus payments to high-risk investments that delivered hefty profits in the short term.
His Treasury minister, Alistair Darling, echoed that view by saying that Britain's main regulator, the Financial Service Authority, should take a hard look at regulating pay.
Angry sentiments on the issue in Congress were palpable on Tuesday, when Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, the Federal Reserve chairman, testified before the Senate banking committee.
Senator Christopher J. Dodd, chairman of the committee, said the "authors of this calamity" should not walk away enriched.
The presidential candidates, Senators Barack Obama and John McCain, have also called for pay limits.
The proposals in Washington are still tentative, and often vague. A Senate draft document calls for a ban on incentive payments that the Treasury deems "inappropriate or excessive" and a "claw-back" provision, requiring executives to give up pay or severance benefits if the firm's financial results are later shown to be overstated.
Other proposals call for a ban on severance payments and allowing large shareholders, with a stake of 3 percent or more, to propose alternative slates of directors. This would be an effort to tackle excessive pay practices by opening up and strengthening corporate governance.
Some corporate governance experts say hastily devised compensation curbs in the bailout package would be a mistake and perhaps open the door to unintended consequences.
"Clearly, the level of pay at some of the Wall Street firms was appalling, given the performance," said Charles M. Elson, a corporate governance expert at the University of Delaware. "But the bailout is about saving the economy, while executive pay is a separate, and complex, issue."
In 1993, Mr. Elson noted, Congress limited the tax deductibility of executive salaries to $1 million, unless it could be demonstrated that the extra pay was linked to performance incentives. That move, he said, contributed to the practice in later years of very generous grants of stock options, which helped drive executive pay to new heights.
In 2007, the total compensation of chief executives in large American corporations was 275 times that of the salary of the average worker, the Economic Policy Institute, a liberal research organization, estimates. In the late 1970s, chief executive pay was 35 times that of the average American worker.
Wall Street has been the top tier of the corporate pay range, with executives earning eight-figure salaries. Its bonus system, which rewards short-term trading profits, has been singled out as an incentive for Wall Street executives to expand their highly profitable business in exotic securities and ignore the risks.
"This financial crisis is a direct result of the compensation practices at these Wall Street firms," said Paul Hodgson, a senior analyst at the Corporate Library, a governance research group.
One possible answer, compensation analysts and economists say, would be to stretch out payments for several years, encouraging executives to pursue the long-term health and stability of the firms they head.
"I'm of a free-market, conservative bent, but I am sympathetic to some reshaping of executive pay on Wall Street," said Kenneth S. Rogoff, a professor of economics at Harvard. "For sure, I would consider very long-term payouts, up to 10 years out."
Whether Congress acts on executive pay or not, Wall Street pay levels are destined to come under pressure, said Michael Karp, chief executive of the Options Group, an executive search firm. The fallout from the financial crisis and the consolidation in the industry, he said, inevitably mean that more people will be competing for fewer jobs, dragging down salaries.
"Of course, superstars will always get paid," Mr. Karp said. "But they won't be the way they used to be."
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