Learning from Ken Feinberg

By J Saft
March 25, 2010

Sometimes it’s what doesn’t happen that is most illuminating.

When Pay Czar Kenneth Feinberg first slashed executive compensation at U.S. firms that benefited most from a government bailout the cry was that this would hurt these weakened firms when they could least afford it, as the best and brightest would leave for better money elsewhere, where the free market still ruled.

Well, the door didn’t hit them on their way out, but mostly because they stayed rooted to their desk chairs.
Feinberg evaluated the compensation of 104 top executives at affected companies in 2009, reducing pay for most to levels far below financial industry norms and their own former earnings.

Yet here we are in 2010 and about 85 percent are still working for the same firms, still toiling for the kinds of wages that may well make them wish they’d gone into the law rather than finance. Remember all those articles in glossy magazines about how impossible it is to make it in New York City on $500,000 a year?

“The argument that we hear all the time; that if we don’t pay more this key official will leave, he will go to a foreign competitor,” Feinberg told CNBC television.

“I’ve always been dubious about that argument and I think the statistics bear out the fact that most officials stay at those companies.”

Feinberg announced this week that he has told AIG, General Motors Co, GMAC Inc, Chrysler Group LLC and Chrysler Financial Corp to cut cash compensation for 119 top executives by a third in 2010 and total pay by 15 percent. Bank of America and Citigroup have repaid taxpayer funds and are now subject to diminished supervision by Feinberg, whose brief is to determine if pay at bailout firms is “in the public interest.”

Feinberg also announced he will examine pay in late 2008 and early 2009 at all 419 companies which got bailout money via the Troubled Asset Relief Program.

Even if you think, as I do, that the mechanisms intended to protect the interests of shareholders in setting executive compensation are broken, the idea of a government Pay Czar is untenable, even risible.  The U.S. bailed out its banks and automakers and had to do something to address the obvious inequity of seeing some of that money line the pockets of executives at the mismanaged firms. His power is more moral than actual, and will diminish quickly as the visceral memory of the acute phase of the crisis fades.

In showing that one of the main arguments used to back ever-expanding executive pay — a market that will snap up the under compensated — may be flawed, Feinberg has done us all a great favor.

The great thing about Feinberg’s little experiment is that it is massively scalable and doesn’t require government intervention. All Feinberg has done is test a false market. If I were on the compensation committee of a corporate board and I looked at that 85 percent figure, I might just feel compelled to give it a go at my own company. Heck, I might even feel I was obliged to.

Executive compensation at U.S. corporations has grown massively in comparison to overall wages. That’s not a problem because it denotes inequality, it is a problem because it indicates that the same market forces that determine most wages are somehow not operating in the same way when the elevator gets to the top floor. One of those markets is false, and I am betting that it is the one tightly controlled by a self-interested group of executives, board members and compensation consultants.

This is a problem, in other words, of shareholders’  rights.

Lucian Bebchuk of Harvard Law School has argued that relations between top executives and boards are not truly arm’s length. There are simply too many ways for management to reward boards for overpaying them. A given board member has much to fear by taking on a highly paid chief executive and little reason to believe he will be rewarded or defended by shareholders if he does. Institutional shareholders have ranged from ineffective to comatose.

All of this makes a case for breaking down the barriers that protect executives and boards from shareholder influence — staggered board elections and takeover defense measures to name just two.

Feinberg, in an admittedly extreme set of circumstances and as the representative of government power, has cut through those defenses with a single stroke, and in so doing, has demonstrated the lie that market forces have driven compensation.

What is needed now is not one big Feinberg working for the government, but thousands of little Feinbergs working for shareholders.

(Editing by James Dalgleish)

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)


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We will never fix the disconnect until shareholders have an incentive to care about the longer term. When 50% or more of a company’s shares trade every day, no one really cares what happens beyond a few minutes. That is why institutional shareholders don’t care. They just trade in and out. If there was a cost attached to trading so frequently, shares would be held longer and you would see a lot more attention paid to these issues.

Posted by safetycity | Report as abusive

Whats new about this story? Workers on the “shop floor” have been saying this ever since executive pay increased by hundreds of thousands while the workers wages stagnated, went down or increased by thousand or two.

Sounds like the people we pay to represent us have finally joined the party and realized that cutting executive pay saves more money than making twenty low paid workers unemployed.

Posted by MagAodh | Report as abusive

If Paulson and Bernanke had allowed those firms to fail as they deserved and the executives to also fail to receive pay and benefits, we would not today be having this conversation.

Reflaton and debt are the solutions chosen by Central Bankers, but the Bond Vigilantes will have the final say. Global citizens will pay the price, and the financiers who brought down the world’s economies and financial systems will be counting their booty.

Posted by pegw | Report as abusive

I think the same argument goes for Congress, the Senate and the executive branch and their staffs. Taxpayers are dishing out mega-millions in pay, benefits and retirement to these knuckleheads without any taxpayer vote. The same old tired argument goes that these guys and gals would go into the private sector if they don’t receive enough compensation. I say, don’t let the door hit you on the butt on the way out. The facts remain that many if not most people in the cabinet and congress will hook up with lobbyists after their stints in office are done. So why are we paying these guys so much?

Posted by Nomasobama | Report as abusive

Something tells me that more cuts are needed…

Posted by yr2009 | Report as abusive

I never bought Feinberg’s arguement that these top executives would leave. His arguement seemed to condone the self serving premise used by the top executives to preserve their over inflated compensation packages.

These top executives who supposedly would go to another country would be at a disadvantage trying to not only learn the new culture, but also the country’s business laws and government policies–all the while trying to make the business profitable.

Top executive pay needs to be restructured across many industries.

Posted by CitizenCM | Report as abusive

This is interesting. Do you mean to tell me that the claims of a mass exodus were not true? Wonder what else they tell us about the “free market” that isn’t true?

Posted by CPA1976 | Report as abusive

Maybe they stay for some strange, rarely seen motive… like honor.

Posted by HarryO123 | Report as abusive

My pay was cut 10% last year and I still work for the company because there wasn’t any other opportunity. I am stuck and looking

Posted by Story_Burn | Report as abusive

Mr. Feinberg, there are fewer opportunities the higher you one climbs in their career. This limits your opportunities for change, especially at C-level.

At any other position, there’s a greater likelihood that people will change jobs for higher pay, barring any personal circumstances or preferences that would negate the desire for more pay. For example, commute, family reasons, company culture, vesting of 401K or pension, or other benefits.

Also, with the economy the way it is, it’s harder to find opportunities. There are fewer jobs that are offering higher pay than what persons are earning currently.

Three years ago, someone were earning 50K as an accountant would definitely consider a same type of job at 60K elsewhere. Unfortunately, the 60K opportunities aren’t out there as much as they used to be.

Posted by gfx1234 | Report as abusive

Good article. The Shareholders own the company — and the Directors are appointed to ensure that executive and management act in the shareholders best interests. What happens however, is that the executive recruit a Director and by divisive proxy ballot put that person up for approval by the Shareholders. From there the Shareholders get shafted as the executive and Directors conspire to do what best for themselves (excessive compensation). In virtually every case of government bailout, the Shareholders were failed by the Directors — who to many, should be criminally charged with dereliction of their duty and fiduciary care to the Shareholders. The false rationale of high pay being necessary to “keep the best” is the same faulty argument made for overpaid politicians and bureaucrats. Joe Citizen, is getting real tired of carrying the burden of this excess with crushing taxes.

Posted by JJWest | Report as abusive

Anybody for maximum wage law? We sure have minimum wage laws in this country, but what about maximum one can earn??

Posted by HANB | Report as abusive

He is still one of the over paid . That is the real problem. You pay paper pushers more than teachers. Even with his pay cut he is the 5 percent of America as far as pay goes. Look at his health plan and days off. So many people complain about working for the government.
We need more free enterprise.

Posted by i80888 | Report as abusive

I am quite sure that executive compensation, i.e. top management and boards, is a small % of turnover and earnings, let alone industry GDP’s.

Posted by Ghandiolfini | Report as abusive

[…] this article interesting, where the laws of wages do not apply for the top levels of a company. Learning from Ken Feinberg | Journalist Profile | Reuters Overpaid employees are not more competitive. __________________ Freedom – When people learn to […]

Posted by Ignoring Poverty? – Page 2 | Report as abusive

Ridiculously high executive compensation abounds while workers are being laid off by the thousands. This is a significant cause of our economic crisis.

Wealth and power in the hands of a few who surround themselves with others who will help to perpetuate that cozy situation.

On the other hand, laid-off workers can no longer pay their bills (whichs hurts the companies they can’t pay), they have no discretionary income to spend (which hurts businesses who rely on consumers to purchase products and services) and they use government resources such as unemployment (which hurts taxpayers).

I’m all for paying fair salaries and generously rewarding performance, but this has gotten way out of hand.

Posted by StepUp | Report as abusive