The Treasury Department has told four bailed-out companies that they can't pay some top earners more than $500,000 cash per year. But it's told the official who made that decision that the rule shouldn't always apply.
Kenneth Feinberg, the Obama administration's pay czar, said Friday that lobbying by Treasury and Federal Reserve officials helped persuade him to exempt about 12 executives from the salary cap. The pay cap will affect about 300 employees at Citigroup Inc., GMAC, American International Group Inc. and General Motors.
The move highlights tension between the government's competing priorities: Appeasing public fury over outsized pay, while making sure the firms retain the talent they need to stay competitive and repay their taxpayer billions.
"It's a little like you have the left half of your brain and the right half of your brain arguing," said Douglas Elliott, a fellow at the Brookings Institution and former investment banker.
"As an owner, you can see why the government wouldn't want to make these rules too onerous. But as a regulator, following the will of Congress, there's an intention to hold these firms accountable and to hold down what they pay their top executives," Elliott said.
Outrage over banker salaries exploded this year after it was revealed that AIG would pay millions in bonuses to employees of the division that had toppled the company. The government provided up to $182 billion to stabilize AIG. Congress held hearings and grilled Treasury Secretary Timothy Geithner about the bonuses.
The Obama administration responded by appointing Feinberg. He oversees pay packages for the top 100 earners at the companies that received the largest bailouts.
As they negotiated their pay packages, the companies warned that pay restrictions could keep them from attracting and retaining top talent. Without competitive pay, they said, it would be hard to regain their footing and repay their bailout money.
Pay restrictions led AIG general counsel Anastasia Kelly to indicate she would leave by year's end, The New York Times reported this week. Four other senior employees whose pay is restricted by Feinberg also indicated they could leave, according to the paper.
AIG spokesman Mark Herr declined to comment on the new pay restrictions. Regarding the report about Kelly's departure, he would say only that she hasn't resigned.
Officials from the Fed and Treasury asked Feinberg to relax pay rules for workers they deemed essential to its success, concerned that too many departures could cripple the company. Treasury owns nearly 80 percent of AIG. Feinberg said out of several dozen requests, he allowed about 12 employees to earn up to $1.5 million in cash for 2009.
A Treasury spokeswoman declined to comment. Fed officials didn't immediately respond to requests for comment Friday.
Officials remain sensitive to the political cost of allowing the companies to keep paying lavish salaries. Geithner and the administration have been criticized for rescuing banks while doing comparatively little for homeowners facing foreclosure.
"I appreciate Mr. Feinberg's continued efforts to rein in outrageous compensation so that folks running companies that continue to be propped up by hard-earned tax dollars are forced to tighten their belts as well," Sen. Christopher Dodd, D-Conn., said in a statement Friday.
President Barack Obama will meet Monday with top executives from banks that mostly have repaid their bailout money. Among other things, he will ask them to adjust their executive compensation policies to reflect the same goals Feinberg pursued with his rulings: Discouraging excessive risk-taking and tying pay to long-term performance.
In October, Feinberg announced pay packages for the top 25 earners at seven companies. Friday's rules affect the next 75 top earners at four of those companies.
Bank of America was exempt because it repaid its $45 billion bailout this month. Chrysler and Chrysler Financial employees earned too little to fall under Feinberg's oversight.
The departures isolate the companies that remain under his control. The concern is particularly acute at Citigroup, whose best investment bankers easily could defect, and at AIG, whose reputation is so sullied that it struggles to retain talent.
"I'm very leery of imposing particularly tough pay restrictions on these companies in which the taxpayer has a big stake," Elliott said. "But other people feel it's important to underline a moral lesson here."
AIG's CEO Robert Benmosche received an exception from the pay cap when he took over earlier this year. Benmosche will receive an annual salary of $3 million in cash and $4 million in AIG common stock.
Last month, Benmosche threatened to quit over the restrictions in pay for top executives, according to The Wall Street Journal. He then backpedaled. Benmosche told employees that while he was frustrated with by the regulatory oversight, he plans to remain at AIG.
Under the rules announced Friday, the 25th through the 100th highest earners at Citigroup, GMAC, American International Group and General Motors also must take more than half their compensation in stock. And at least half must be delayed for three or more years.
The new rules apply only to the second half of December. They will not affect money the employees already have been paid this year. But Feinberg said the rules are important because they will affect many workers' year-end bonuses and stock grants. They also will serve as a starting point for negotiations next year over pay packages for 2010.
Under the new rules, cash can make up only 45 percent of the employee's pay. At least half of total compensation must be "long-term" and can't be redeemed for at least three years. And all incentive pay must come from a pool whose size hinges on earnings or another performance measure.
AP Business Writer Stephen Bernard in New York contributed to this report.