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 were the latest in more than a year’s worth of government intervention into matters once considered inviolable aspects of the country’s free-market economy and represent a signal moment in the history of the American economic experiment. After years of setting minimum wages, the government is now telling some companies how they should structure pay for the men and women who run them.
The actions Thursday put the United States more in line with European governments.
At the Treasury Department, President Barack 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 that 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 own compensation but give the Fed veto power. It extends the regulators’ reach into pay practices affecting tens of thousands of bank employees, from senior executives to traders of complex securities.
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 industry representatives are wary of the regulations, concerned that they could ensnare even relatively low-level employees of smaller banks.
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 companies included in the Feinberg’s cash crackdown are AIG, Citigroup, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial.
Daniel J. 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,’ ” Mitchell said.
