The debate over “extravagent” executive pay began with the backlash over executive compensation at AIG after it received bailout funds from the federal government. Soon after the AIG bonuses can to light new regulations limiting executive pay and bonuses were imposed on banks that received TARP funds. This reaction to current events set a dangerous precedent and resulted in many banks, disliking this increased level of political oversight, returning or moving to pay back TARP funds as quickly as possible.
This focus on executive pay has continued with the governments new reform policies and may now move outside the businesses who received funds from TARP. According to a new article from Investment News, the SEC may impose new restrictions on broker firm executives they deem to have acted outside the interest of their clients. These new proposals, while vague, are a strong step towards controlling how the private sector pays its top executives.
“New SEC rules could include provisions for recoupment or claw-back of excessive executive pay, as well as limits on incentive pay that would be triggered by actions deemed inappropriate for clients, said Steven Hall, managing director of Steven Hall & Partners LLC. He said that he isn’t doing work for any large broker-dealers on the impending SEC pay rules.
In a June memorandum to clients, Ropes & Gray said that bank holding companies, broker-dealers and investment advisers must disclose to appropriate federal regulators by April 21 “the structure of all incentive-based compensation arrangements that they offer.”
The SEC’s goal is to determine whether the compensation structure provides an executive officer or employee with “excessive compensation or benefits, or could lead to a material financial loss to the institution,” the memo said.
Also by that date, federal regulators are to “prescribe regulations that prohibit any type of incentive-based payment arrangements, or any feature of such arrangements, that the regulators determine encourage inappropriate risks by the institutions by providing” an executive or employee “with excessive compensation or benefits, or that could lead to a material financial loss to the institution,” the memo stated. “No reporting of actual compensation will be required.”
While it is understandable that the government would need to monitor the pay of execs at firms receiving TARP funds, which are taxpayer funds, the government’s new proposal is a disruption of the private market that creates a serious slippery slope. What a business offers its employees for compensation, including its executives should be determined by market forces, not government mandate. Allowing the government to adjust pay risks creating an environment where pay is determined by political and not economic factors, this could be disastrous for our economy.