Randomly Noted

The fraught and mixed nature of Americans’ feelings towards big pay days seemed on display today as the so-called pay czar, Kenneth Feinberg, criticized 17 U.S. firms for pay practices at the height of the credit crisis.

Despite the critique of the bankers for handing out some individual payouts above $10 million while taking help from the government, Feinberg didn’t even reach for his biggest weapon, such as it is, a censure that the firms broke with the public interest.

All of which leaves one thinking, why undertake this particular exercise? Why the preceding hoopla?

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Yesterday’s blog about Microsoft CFO Chris Liddell’s appointment as General Motors’ new CFO promised an update about his pay package. This story, by WSJ colleagues John Stoll and Joann Lublin, has the compensation info plus details of the “arm wrestling” that went on between GM’s board and the U.S.’s “pay czar” Kenneth Feinberg. It also reveals that GM began wooing Liddell before he quit the tech giant and indicates, as I surmised yesterday, that he could be an eventual GM CEO candidate.

The cuts U.S. pay czar Kenneth Feinberg is requiring for top executives of seven companies taking government bailout funds, and the Federal Reserve’s proposals to regulate bank compensation more aggressively, have several provisions that smack more of populism aimed at swaying public opinion than of governance improvement.

Cutting so severely the top cash compensation for top performers at affected banks ensures they won’t be able to compete for top talent. The seven bailout firms, and the 28 banks on which the Fed proposes to focus, are hardly the only companies in global finance that could use the talents of executives accomplished enough to deserve high salaries. Why work for Bank of America when Macquarie Bank or HSBC doesn’t cap the salaries of its most talented employees?

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Earlier this week, a reader commenting on one of my blogs grumbled about “liberal” journalists. I’d actually describe myself as a middle-of-the-roader.  But what I’m about to say will probably prompt more harrumphs about my purported politics: We’ve been living in a world where many college kids eye the jobs landscape and wonder to themselves: “I’d like to be a school teacher but I’ll have to scrimp and save my entire career. So, I think I’ll become an investment banker or join a prestigious consulting firm, make great wads of money, and then quit and fulfill my dreams as a teacher or philanthropist.” With the Fed and Feinberg now cracking down on the paychecks of executives running federally controlled firms, will the  U.S. jobs landscape shift? Will the playing field across professions appear a tad more level than before? Will a young person think to herself: “I can make a really nice living in banking but the earnings potential isn’t as great as it once was, and I really want to teach…”? If this were to happen naturally, organically, that might not be a bad thing. Am I worried that Feinberg & Fed’s moves will make U.S. companies less competitive than foreign firms that might not be subject to similar pay limits? A bit – but if the compensation limits (being imposed in the U.S. as well as Europe, by the way) serve to prompt bankers and executives to behave more responsibly with our (taxpayers’) assets, that wouldn’t be a good thing in the aftermath of the global financial crisis.

Below the headlines about 50% compensation cuts being ordered for top earners at the seven fallen angels under his control, the so-called federal pay czar, Kenneth Feinberg, is apparently also forcing some changes in governance.

Feinberg, who technically is called the special master of compensation at the U.S. Treasury Department, didn’t just cut pay for the 25 top people at the humbled seven. He also delved into some of the corporate governance issues that have been talked about for years in U.S. boardrooms and among activist investors.

He will insist on a split between chairman and chief executive jobs, a model already followed in other nations. Staggered board terms will be eliminated. and boards of directors will have to create risk committees.

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The first paragraph of The Wall Street Journal article uses the verb “pushed” to describe the decision by outgoing Bank of America Corp. Chief Executive Kenneth D. Lewis to go without compensation for 2009.

The pusher, of course, was Kenneth Feinberg, the so-called pay czar put in place by the Obama administration to oversee pay practices at the companies receiving major federal assistance.

Imagine for a moment that this is not about Ken Lewis (a Bank of America spokesman, it should be noted,  told the Journal Lewis voluntarily agreed to go without 2009 pay), but instead about a theoretical CEO at a theoretical company.

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For all the controversy about high pay on Wall Street and all the statistics more broadly about the growing gap between the pay of average U.S. workers and top executives, it’s still quite unusual to see high pay for an individual apparently factor in a merger transaction.

But the case can be made that the up to $100 million payday expected by successful energy trader Andrew Hall of the Phibro unit of Citigroup is why Phibro was just sold to Occidental Petroleum.

It avoids a head-on collision between Citigroup – owned 34% by American taxpayers via their government – and the pay czar Kenneth Feinberg, who has a mandate to hep set pay at companies receiving significant government aid.

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The so-called U.S. pay czar, Kenneth Feinberg, appears headed down the correct albeit predictable path as he guides the compensation practices towards top executives at companies receiving substantial financial assistance from the federal government.

It’s obviously a hot political issue, as taxpayers somewhat understandably  feel that if they supplying the sustenance for these large enterprises they ought to get to play role of paymaster.

The growing consensus of enlightened views on executive compensation revolves around deferred equity. Long term is seen as better to keep risk taking under conrol and align executive interests with the long-term interests of shareholders, emphasis being on the phrase long term.

And so, according to a Tuesday front page article in The Wall Street Journal by Deborah Solomon, Feinberg will meet his mid-October pay guidance deadline by talking about affected executives getting less cash up front in exchange for stock that won’t pay out for a few years.

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The WSJ reports Citi may owe star energy trader Andrew J. “Andy” Hall $100 million.  Gasp!

That “gasp” is sincere, by the way. That’salottamoney.

When I read the Journal piece the green envy monster perched on my left shoulder, as she tends to do in such cases. I instinctively cheered the prospect of Kenneth Feinberg, Obama’s pay czar at the Treasury Department, ripping up government-controlled Citi’s contract with Hall. Or trying to, and thereby provoking a big public fight with fat-cat Hall for all of us to salivate over like so many Romans in the Coliseum.

Then I started thinking. And Ms. Monster faded away. Could Hall have actually earned the money via his purportedly profitable Citi unit Phibro LLC? Could he be one of a few Citigroup employees who actually delivers for the company and its shareholders?

Is there anything inherently distasteful or immoral in successfully matching risks with return, as Hall appears to have done for years, thereby delivering himself and his employer generous profits?

Isn’t he smart to have crafted a lifestyle described this way by WSJ colleagues Mike Siconolfi and Ann Davis:

“A far cry from the buttoned-down Wall Streeter, Mr. Hall leaves the office most afternoons to go rowing or to practice calisthenics with a ballet teacher. Outside the energy markets, Mr. Hall ranks among world’s top collectors of contemporary art, favoring often-shocking works that explore subjects including the human toll of the Nazis.”

I realize that the financial crisis was largely a result of banking types taking foolish risks and foisting them on far too many people who had stopped using their brains. Are we now to punish those who risk wisely?

As the WSJ writes: “Hanging in the balance in the Hall matter is an important source of profits for Citigroup, which is trying to rebound after a disastrous 2008. Phibro, with a small core group of traders, has generated hundreds of millions of dollars in profit for Citigroup over the years. This spring, after the new pay curbs were unveiled, Mr. Hall and others on his team threatened to leave if their pay was cut by the new compensation rules, people familiar with the matter said.”

Feinberg and the Obama administration have to be ultra-careful with this case and similar ones that will undoubtedly crop up. Hall will leave if his pay and reputational prospects dim at Citi. Goldman Sachs, hedge fund firm GLG – and a few other non-risk-averse players – would likely be happy to take the team. U.S. and U.K. taxpayers – now owning a slew of financial institutions – could find themselves (ourselves!) stuck with laggard companies completely at the mercy of independent entrepreneurial rivals.

Here’s what I’d like to see Feinberg and the government attempt to do: If popular politics mandate the effective removal of mega-earners like Hall – the mood across the country is fairly ugly at the moment – the Obama administration should permit creation of risk-incubator programs inside taxpayer-owned firms. They’d be aimed at tapping up-and-coming Andy Halls who have intriguing and important – and, yes, risky – ideas for new lines of business. The program would apply to financial and non-financial firms (such as GM) now owned by Uncle Sam, and could help preserve and nurture a measure of boldness and innovation within the companies.