Fed moves to restrict bank execs' pay; Regulators' reach deepens; Guidelines would give Fed veto power over pay schemes it deemed too risky.

Byline: Frank Ahrens and David Cho; The Washington Post

WASHINGTON -- The Federal Reserve joined the Treasury Department on Thursday in imposing new limits on executive pay, extending the government's control over compensation at taxpayer-owned companies to institutions that are merely government-regulated.

The restrictions, the latest in more than a year's worth of government intercession into matters once considered inviolable aspects of the country's free-market economy, were criticized as symbolic and probably ineffective by both conservatives and liberals.

But the moves are a signal moment in the history of the U.S. economic experiment: After years of setting minimum wages, the government now is telling some companies how they should structure pay for the men and women who run them.

European governments, particularly Germany and France, have pressed for international standards capping executive pay, a move that the United States and Britain have resisted, and these are the first steps that the U.S. has made in that direction.

At the Treasury Department, President Obama's pay czar, Kenneth Feinberg, announced sharp cuts in pay for 175 top executives at seven big banks and automakers that received hundreds of billions of dollars in federal bailout money during the financial crisis. The new pay structures reduced the cash salary paid to some executives by 90 percent and tied more compensation to long-term stock awards.

"There is entirely too much reliance on cash, and there's got to be a better way to tie corporate performance to long-term growth," Feinberg said at a media briefing. "I'm hoping that the methodology we developed to determine compensation for these individuals might be voluntarily adopted elsewhere."

At the Federal Reserve, Chairman Ben Bernanke proposed a broader but less proscribed plan to restrict pay at banks. The aim is to prevent them from rewarding employees for actions that could endanger the firms' long-term financial health. Unlike Feinberg's more limited plan, the Fed's guidance would cover all banks it regulates -- even those that never received a bailout -- as well as U.S. subsidiaries of foreign companies.

However, the Fed's proposed rules have wiggle room: The guidelines would let banks set their compensation but give the Fed veto power over pay practices that it determines could threaten the safety and soundness of a bank. It extends regulators' reach into pay practices affecting tens of thousands of bank employees, from senior executives to traders of complex securities.

The Fed's plan will take effect sometime after a 30-day comment period

"I've always believed that our system of free enterprise works best when it rewards hard work," Obama said Thursday. "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."

Since the crisis began, the federal government has used taxpayer money to buy preferred shares of banks. Failing Fannie Mae and Freddie Mac were taken over by the government. American International Group (AIG), the world's largest insurance company, is 80 percent owned by U.S. taxpayers. The federal government has picked winners (Bear Stearns) and losers (Lehman Brothers). And General Motors' CEO Rick Wagoner effectively was fired by the White House.

Executive compensation long has been tied to company performance -- the higher profits and stock prices go, the bigger the payday for top executives. But Bernanke, other regulators and many on Capitol Hill say compensation packages were so high that they led executives to put their companies and shareholders at risk solely for the benefit of multimillion-dollar bonuses.

"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," Bernanke said.

The banking industry viewed the Fed's guidelines with ambivalence. Many banks already are moving to revise compensation practices for top executives and other employees who could expose the bank to bet-the-company risks. But the industry is wary of the regulations, concerned they could ensnare even low-level employees of smaller banks.

"If it focuses on those who really put institutions at risk, that's fine," said Ed Yingling, chief executive of the American Bankers Association. "But if you get down to the point where you have regulators looking over the shoulders of branch managers, it really does not make sense."

Long-simmering resentment over executive compensation boiled over in March when it was revealed that AIG, the recipient of a taxpayer-fueled bailout package worth up to $180 billion, was paying hundreds of millions of dollars in bonuses to a trading division that nearly brought the company and the global financial system to its knees.

The seven companies included in Feinberg's crackdown are AIG, Citigroup, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial.

The new pay ceilings are low by Wall Street standards, and they by no means are watertight. They still allow for hefty compensation.

For instance: Feinberg reduced the cash salary of 13 top Bank of America executives by $89 million for 2009. But the total compensation for each of the 12 executives beneath departing Chief Executive Kenneth Lewis still averages $6.5 million this year. Feinberg can't legally change Lewis' $70 million retirement compensation. And the companies escape the curbs if they pay back the bailout money.

Still, Feinberg managed to slash some $879 million in total 2009 compensation at the seven companies, compared with 2008 levels.

Sen. Charles Schumer, D-N.Y., said Feinberg did not go far enough. Schumer urged Feinberg to push the government deeper into corporate boardrooms via a number of proposals, such as forcing companies to split the jobs of chief executive and chairman.

Daniel Mitchell, senior fellow at the libertarian Cato Institute, says he worries about the slippery slope.

"I fear as politicians get a taste for interfering with executive pay for one little subset of companies where you actually could have sympathy for the approach, what's going to stop them from saying, 'Hey, this was popular. Let's do a little demagoguery before the next election and go after all the CEOs.' "

Washington Post correspondent Anthony Faiola in London contributed to this report.

CAPTION(S):

Kenneth Feinberg, compensation special master (0408980321)

Ben Bernanke, chairman of the Fed (0407396530)

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