Published June 10, 2009

US Treasury poised to sketch out pay rules

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(WASHINGTON) The US Treasury Department today is expected to outline new rules on compensation for executives at firms that received aid from the government's financial rescue fund, sources familiar with the plan said on Monday.

Kenneth Feinberg, who oversaw compensation to the survivors of the Sept 11, 2001, terror attacks, has been tapped to monitor pay practices at bailout firms, said one source familiar with the Treasury's plans.

Policy-makers have been under intense pressure to curtail executive compensation since the government started doling out rescue funds from a US$700-billion kitty created in October.

President Barack Obama's administration has argued that Wall Street's pay practices pushed banks to take excessive risks, helping sow the seeds of a financial crisis that is now punishing the US economy with a severe recession.

'This crisis was caused in part by the fact that compensation practices just got way divorced from reality,' US Treasury Secretary Timothy Geithner told Reuters Television a month ago.

Congress sought to clamp down on executive pay at companies receiving taxpayer assistance when it passed a stimulus package in February, and the rules Treasury is set to lay out will detail how that Congressional language will be applied.

The standards for rescued companies may also remain at the heart of a plan that the Obama administration will present to cover the financial services industry at large.

As part of that effort, bank regulators are expected to put in place rules that could restrict compensation if an institution's pay structure rewards actions that could put its 'safety and soundness' at risk.

The Federal Reserve has said it plans to use its authority to promote healthier pay incentive practices.

'Compensation systems that incentivise employees to take actions that entail excessive risk-taking in light of expected returns and costs can also have adverse effects on firm safety and soundness,' Fed governor Daniel Tarullo said on Monday.

While acknowledging the topic is sensitive, Mr Tarullo said supervisors should take additional action on executive pay rules to supplement guidance they have already provided.

Some investor-rights advocates say executive pay should be based on a broad index of a company's health rather than share prices, which can fluctuate wildly and may not reflect long-term value.

'I do think we're going to see more measures on things like liquidity and capital, things that in the past weren't as big an issue,' said Susan O'Donnell, a Boston-based managing director at compensation consultant Pearl Meyer & Partners.

Gene Sperling, a Geithner counsellor, is due to discuss the question of executive compensation when he testifies before the US House of Representatives' Financial Services Committee tomorrow.

Republican Barney Frank, the committee chairman, has faulted a 'heads I win, tails I break even' compensation system.

Creating new standards for executive compensation is part of a wider debate in Washington about how to create a fresh regulatory framework for financial markets. - Reuters