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The Wrong Direction

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[img]646|left|||no_popup[/img] New Englanders are fond of saying, “No matter where you go, there you are.”

While most of us chuckle at its quaint circularity, there is wisdom for the ages in this Zen-like phrase. 

Seven companies on government life support face a deadline. Each of these recipients of taxpayer bailout monies must submit its executive pay plans to the federal government for approval.

How Wrongheaded

It will be up to the Obama administration’s pay czar, Kenneth Feinberg, to give the thumbs up, or to tell these companies to go fish.  Technically known as the Special Master for TARP Executive Compensation, Feinberg is best remembered for his key role in running the government fund for the families of 9/11 victims.

With that experience under his belt, the administration tapped Feinberg to be its point man on executive compensation. 

The question of unchecked compensation for executives at firms that were bailout recipients has been a hot button issue.  When the press got hold of the bonuses being paid to AIG execs after that firm received more than $160 billion in taxpayer assistance, pundits on both sides of the aisle got out their long knives and started looking for scalps.

There was talk of lynching the AIG execs who made these boneheaded compensation decisions.  The execs who were the potential beneficiaries were forced to change their identities and duck into federal witness protection.

Feinberg has stepped into this firestorm of public outrage. 

Along with AIG, Bank of America Corp., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial all must submit their executive pay plans to Feinberg for approval.  As pay czar, Feinberg has the authority to oversee the compensation for the 100 highest paid employees at each of these firms.

How Feinberg will determine which packages are fair and which will be rejected remains an open question.

[img]647|left|||no_popup[/img] The Obama administration chose not to cap salaries or impose strict limits, partly because Congress capped bonuses at no more than one-third of total compensation. Although Feinberg was appointed to take the heat for any pay decisions, criticism for failing to be tough enough or being too draconian still will be aimed at the White House.

Compensation for executives like Citigroup energy trader Andrew J. Hall will be in the public crosshairs.

Talk About Timing

In 2008, Hall pulled down more than $100 million. Hall ran Philbro LLC, an energy trading subsidiary that is wholly-owned by Citigroup, a company that has gotten $45 billion in taxpayer subsidies.

Hall’s unit was one of the few bright spots on Citigroup’s otherwise dreadful balance sheet. He successfully milked the energy market by speculating when global crude oil prices were at all time highs.

Despite the disaster on the banking side of Citigroup’s operations, Hall’s unit posted record profits.  Although Feinberg can’t wipe out existing compensation contracts like Hall’s, he can prod companies like Citigroup to renegotiate these agreements by threatening to take it out of the hide of other top execs, such as CEO Vikram Pandit.

Feinberg’s looming presence appears to be having some effect on the compensation packages being floated.

GMAC Financial Services Inc. is proposing that its 25 highest-paid employees in 2008 get $73 million this year, or an average of slightly less than $3 million each. Bank of America Corp. is proposing average compensation of about $7 million per executive, while Citigroup's proposal is for an average of about $10 million apiece.

To most Americans struggling to make ends meet during the worst recession since the 1930s, these pay packages still seem despicable. In the topsy-turvy world that is Wall Street, anything lower would amount to the functional equivalent of bread lines.

Allowing the government to set compensation for any executive is a slippery slope.

Arguably, firms like Lockheed-Martin or Boeing, which supply the government with military hardware, are federally subsidized.  Construction companies that build roads and highways with federal funds can, likewise, be classified as reliant on taxpayer support. 

Every U.S. bank is the beneficiary of the government solvency guarantee supplied by the FDIC.  Drug companies often receive hundreds of millions each year for research while hospitals rely heavily on Medicare. 

If the government gets in the business of regulating the pay of the firms who have been the direct beneficiaries of the federal bailout, can oversight of pay at other concerns be far behind?

American taxpayers have genuine interest in making sure their money is spent wisely.  Like any businessman, we want to make sure our investment is not being squandered.
 
Regulating executive pay may be politically expedient, but it is not the answer.

The government is not equipped to make the types of decisions Feinberg has been charged to make. Fair pay cannot be measured by the court of public opinion.

This is a decision for the marketplace.  If shareholders and consumers are going to stand idly by while executives like Andrew Hall are paid $100 million a year, then the government should stay the hell out of this mess.

Maybe next time when these blokes start to falter from their own largess, we won’t be so quick to open our checkbooks to save them.

John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com