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Nov 08

Geithner against government involvement in executive pay decisions

Posted by dbedell in Timothy GeithnerObama AdministrationMorgan Stanleyexecutive payexecutive compensationCredit suisseCareers/Management


According to a report on Reuters, on Monday Treasury Secretary Timothy Geithner said that the government should not be involved in setting corporate executive pay levels. 

What impact, if any, this will have on how regulation of compensation plays out is unclear, but it does once again bring to the fore the arguments on both sides of the executive pay discussion.

The ability of companies to leverage executive pay in order to pull in talent has long been discussed as a key concern in relation to US legislators’ efforts to curb what has been viewed as excessive compensation packages for corporate and financial executives.

As the New York Times pointed out in a piece last week, the Obama administration—along with a number of economists—have taken the stance that excessive risk-taking practices were encouraged by exorbitant compensation packages linked to returns , which was a key driver behind the financial crisis.

The Times also noted that despite much discussion on how to curb bonuses to discourage these practices, compensation has continued to grow over the past two years—rising as much as 15 percent on average in some industries, such as asset management.

Although the administration has focused efforts on changing compensation practices to curb risk-taking behaviours, a June 2010 compensation review by the Fed noted that many such incentive plans at financial services firms were still active.

A number of the biggest financial institutions—including Credit Suisse and Morgan Stanley—have instituted clawbacks to pull back bonuses in the event that traders lose significant money on excessively risky activities, but in comparison with the overall size of the market and money at-risk, this is a minute piece.

The Fed is still at work on its compensation review and is negotiating with major institutions over changes in compensation structure, however no information will be released on the results until next year.

Meantime the comments of Mr Geithner seem to suggest that the discussion on how regulators will enact legislated pay reforms is far from closed.

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