In a forthright luncheon address to the attendees of the 2010 Professional Liability Underwriting Society D&O Symposium in New York, Kenneth Feinberg described the challenges he faces in his role as the federal government's executive compensation special master for companies that have received Troubled Asset Relief Program (Tarp) payments.
Feinberg asserted that while many may label his work is a "sideshow" the influence of his work has been wide ranging; both in the level of public interest and those non-Tarp institutions that have voluntarily adopted his approach to executive compensation. He attributes this cautionary behaviour to pre-emptive political cover and in anticipation of litigation arising from claims of excessive compensation.
There is a tremendous amount of interest in his work said Feinberg: "There is such economic uncertainty today, unemployment is so high, there is so much anger and unhappiness out there about the state of the economy that what I am doing strikes a chord in Congress certainly, but also in the minds of the American people."
Furthermore, he is the only person who is taking executive pay prescriptions and calculating the dollars. "If you combine these two variables, of public uncertainly and anger, with actual liquidated dollars; there is more than a little interest in what I am doing," he said.
Feinberg described in depth the difficulties he faces in negotiating executive pay. Firstly, he must determine compensation in a manner that will keep these companies competitive so they can repay their Tarp obligation. Secondly, paid determinations must be at a level that promotes loyalty and long-term commitment to that institution so 'irreplaceable' people don't leave.
"Irreplaceable is something I hear all the time," said Feinberg. There is fear among the Tarp assisted companies that a capping of executive pay will result in an exodus of vital employees. In December, American International Group's general counsel, Anastasia Kelly, walked out after Feinberg limited executive pay at the company to $500,000.
Feinberg's response to this argument is unwavering. "What good is it for a company to say: 'If you don't give us this much, this guy will leave and the company will be threatened?' One answer to that is: if I give that guy that much, there will be such a howl out there in Congress and elsewhere that the guy will likely leave anyway. Who wants pickets at his front lawn?"
Feinberg warned the audience not to underestimate the importance of the populist response. "That drives policy; you can't ignore that populist response," he said. Furthermore, he asserts the so-called irreplaceable employees already have left, and given the state the companies are in as a result of its employees, they can't be that irreplaceable. He quoted Charles de Gaulle to make his point: "The graveyards are filled with irreplaceable people."
The media have labelled Feinberg a pay czar. It is an unfortunate term, he said. "It sounds as if I am imposing - by imperial decree - compensation decisions on executives in corporate America. Nothing could be further from the truth.
"What I am really engaged in is a negotiation dance with these corporate officials to try and work out, by consent, compensation that will be acceptable to the Treasury and to the corporations themselves; pursuant to the law passed by congress," he said.
He said one of the hardest challenges is to chart a formula of compensation that meets all of the variations that are uncovered. "Invariably companies are asking for compensation that is excessive. That's why it's give and take and you hope that you eventually come up with a package that is defensible. In 2009, with some modest disagreement the seven [Tarp] companies fell into line."
He added: "It's not rocket science. It is a careful attempt to meld the statute, the regulations, the data and the anecdotal evidence. It is a combination of substantive judgement and political antenna.
"You realise you are not going to assuage populist sentiment; so you try and just do the right thing".