TARP Payback

Pay czar in action

He who pays the piper decides how much the piper gets paid, as the old saying doesn't quite go. In June, Treasury Department official Kenneth Feinberg was appointed the new federal "pay czar." His mandate: to dictate to companies on the federal teat exactly how they can compensate their 100 highest-paid employees.

Feinberg lacks the legal power to break existing contracts, even at companies receiving bailout money from the Troubled Asset Relief Program (TARP). To get around this obstacle, he plans to "negotiate" reductions in regular compensation or future bonuses to balance out this year's "excessive" compensation. (For any contract solidified after February 2009, bonuses for businesses getting TARP funds are payable only in restricted stock, and they are capped at one-third of normal compensation.)

These political limits on pay create economic dilemmas for TARP companies. The New York Times aptly summed up one big problem: "It could be politically untenable for a company like Citigroup to pay gargantuan sums even to those who generate gargantuan profits—the very people the company must retain if it is to recover."

In an attempt to level the playing field for TARP companies, the House of Representatives in late July passed the Corporate and Financial Institution Compensation Fairness Act of 2009. If it becomes law, the act will establish rules about how a financial services company, whether or not it's on the dole, can pay its top executives. The dictates include requiring shareholder input on executive pay and prohibiting risky incentive-based compensation mechanisms, with the definition of risky to be determined by a federal regulator.