Needed on Executive Pay: Legislation, not Moral Suasion
by John Russonello, Fri Oct 23, 2009 at 05:42:13 AM EDT
(Cross-posted from Think it Through)
Ted Kennedy is gone but he is still helping Barack Obama. The person who Kennedy tutored and entrusted with the job of chief counsel to the Senate Judiciary Committee during the 70's and early 80's has taken the first meaningful step to bring about a correction in the way Wall Street compensates its executives.
Kenneth Feinberg, the administration's pay czar has ordered companies who have received taxpayer bailout money to cut the pay to their highest executives.
Feinberg is the first person in the Administration to take action that responds to the bitterness felt by Americans toward government enabling Wall Street executives to reap millions of dollars in pay after they have caused the ruination of the economy. This resentment could possibly deepen as the recession hangs on and the dollars and cents concerns of voters dominate the 2010 elections - more so than Afghanistan or health care.
When Feinberg says the government will "order" reductions in pay to executives of bailed out companies, it represents the first time anyone associated with the Obama administration has used such a verb. In New York a few days ago, President Obama's message to Wall Street was: "I would ask that you join us" in reforming Wall Street practices. Last Sunday on the ABC news show This Week the President's closest political advisor David Axelrod, when asked about the Wall Street bonuses, said: "we have, as I said, limited sway other than moral suasion with some of these - a lot of these institutions."
Feinberg is someone who is more adept at using the law to achieve a specific goal than relying on an "ask:" or an appeal to one's sense of morality. He has a reputation as a tough negotiator who knows Wall Street but is not a person of Wall Street.
As the press secretary for the House Judiciary Committee at the same time that Feinberg was running Kennedy's Senate Judiciary Committee, I noticed that staffers on the committees would call him Senator Feinberg behind his back - sometimes jealously, but always with an acknowledgement of some truth to the label.
Ted Kennedy, being secure and smart, promoted this because it made him a more effective senator. Since Kennedy trusted Feinberg's skills and integrity the Senator could be several places at once and get more done.
Today, over 30 years later, Obama is indicating the same type of confidence in Feinberg. The announcements this week by the pay czar represent just the beginning of reforms on executive pay. Perhaps most importantly, they start to move away from the idea that Wall Street will - or even should - be moved by moral suasion. Stephen Labaton reports for the New York Times that the federal government asked the insurance industry to repay $45 million dollars in bonuses, and so far only $19 million has been paid back. I am surprised that it is as high as $19 million. You cannot blame Wall Streeters for being greedy -- they are in the business of making money. That is what they do. It is up to the government to keep them honest through tough regulation and oversight.
Much more is needed than Feinberg's first step. In June I posted an idea that would apply a direct correction to Wall Street bonuses. Under my proposal, corporations that pay their top executives bonuses while the companies are losing money would be required to pay the federal government a tax worth ten times the bonus. It is a conservative idea, to incentivize sound business practices. It might have made a number of corporations think twice before handing out bonuses last year. For example, AIG gave $38 million to top executives while it was losing $99 billion, and Citigroup handed out $60 million in bonuses while it was losing $18 billion.
After months of hearing Larry Summers and Tim Geithner make excuses for the government's failure to force reforms on executive pay, Ken Feinberg is a breath of fresh air. We can only hope that he takes an increasing role in the Treasury Department's dealings with Wall Street, to the point where the Summers and Geithner acolytes begin to refer to him as Secretary Feinberg.
John Russonello is a partner with Belden Russonello & Stewart:Public Opinion Research and Strategic Communications in Washington, DC. He writes the blog "Think it Through."