Kirkland & Ellis recently brought together a select list of CEOs and general counsels for a private dinner at its impressive New York City offices. The timing was remarkable: The markets had dropped 1,000 points in intra-day trading (and recovered somewhat to close down at around 350 points), but the main draw was New York and Kenneth Feinberg, special master for executive compensation at the U.S. Department of Treasury.
Appointed to the Treasury post by President Barack Obama shortly after he become president, Feinberg rules over the compensation of the top 25 corporate officers at each of those companies—there are now only five—that took TARP funds. Executives from each of those five—General Motors, GMAC, Chrysler, Chrysler Financial and AIG—were not among the guests invited to the private dinner arranged by Kirkland partner Jay Lefkowitz, with whom Feinberg worked closely when he served as administrator of the 9/11 Victim’s Compensation Fund while Lefkowitz was a senior White House official.
“We wanted to offer a forum for our public company clients to have a real give and take with Ken Feinberg on issues relating to executive compensation and to get a chance to understand from Ken how the work he is doing for the Treasury Department offers insights into compensation practices more generally in the current governance environment,” said Kirkland partner David Fox.
After dinner, Directorship took the opportunity to question the special master on his role in corporate reform and compensation. The conversation was informative, and, like Feinberg himself, highly animated.
How would you define the scope of your role?
Firstly corporate governance – the whole issue out there about the power of shareholders, the role of independent compensation committees, the role of boards of directors – none of those corporate governance issues are on my watch. Those issues are addressed by the administration by other initiatives.
I have a very limited statutory mandate now down to five companies and my role is just to determine compensation packages for the top 25 corporate officials at each of those companies. I do have some other statutory roles to play but the actual determination of compensation in individual cases is limited.
Is it realistic for you to cap compensation given the range of highly creative ways companies can pay their executives?
Yes, it is. For the people who are subject to my jurisdiction, the total compensation packages are to be determined by the office of the special master. That does not just mean cash salaries, but includes all stock, perks, severance packages and retirement benefits.
How do you evaluate what a certain package may be worth, especially if it includes options – which are notoriously hard to evaluate?
The simple answer is that options are prohibited. There should be no guaranteed compensation other than modest cash-based salary of under $500,000 annually. The rest should be in the form of stock, which cannot be redeemed except over a two, three or four-year period: no perks beyond $25,000 without approval from me: No golden parachutes. No severance packages that are a subterfuge to get around lower compensation.
You recently sent letters to all 419 TARP companies requesting information about employees that received more than $500k in 2008/9. Are there any concerns that directors and/or compensation committee members at these companies should have in the event that you determine the pay packages they approved are excessive or ‘counter to the public interest’?
The statute prohibits any attempt by me – other than through the use of the public bully pulpit – to force these companies to do anything. I have no enforcement authority to file lawsuits. I have no authority to subpoena records or anything like that.
I do not feel that is exposes boards to litigation arising out of my specific look back review and we will see whether there is in fact any need for me to claw back salaries.
Like it or not, what you are doing is being projected onto a much broader set of companies. The media, the public and several hundred Congressmen are evaluating other pay practices by your standards. With that in mind, what should comp committee members in general be doing?
What they have to start thinking about, I would hope, is to look at the prescriptions that the Treasury has promulgated under its mandatory jurisdiction and to decide whether in the context of their own companies, they should be adopting some those prescriptions taking into account the situation at their company and its particular culture and history of compensation. It is important to remember, that one size does not fit all but I would hope that boards would be voluntarily trying to see whether the prescriptions and rules fit for them.
Do you have any feelings on what the right mix of compensation should be?
Yes. We think that the right mix is roughly 45 percent cash and 55 percent stock. For the people I deal with that stock cannot be restricted or conditioned (or options) except one third of the total package can be subject to bonus restrictions. The base cash salary cannot be in any way conditioned.
You mentioned early the use of the bully pulpit for aiding you in achieving compliance at companies beyond you direct legal jurisdiction. With this new project how much do you think you may need to do this?
It is still too early to tell. We are not sure if we are doing anything right now, but it does remain on option.
What’s next for Ken Feinberg?
Ken Feinberg will be long gone from Treasury before all of these five companies can repay their debt. I will probably be long gone period. But the law is clear that as long as they owe the taxpayer money their top people will have their pay determined by treasury.