US move to regulate executive pay may hurt companies it is saving

 The Obama administration’s moves to rein in executive pay sparked criticism on Wall Street, as lenders such as Bank of America Corp. said the measures may hurt the very companies the U.S. is intent on saving. 

As Scott Silvestri, a spokesman for Bank of America, said, the top performers of Bank of America are recruited away for fair-market compensation by usage of pay concerns. Kenneth Feinberg, the Treasury Department’s special master on compensation, said he had slashed total pay at firms including Bank of America, Citigroup Inc. and American International Group Inc. by as much as 50 percent. The Federal Reserve, moving in tandem, announced guidelines aimed at making bank compensation more tied to risk management. 

Together, the measures are meant to address what the Obama administration calls unchecked risk-taking fueled by excessive pay. The credit-market meltdown that followed led to a financial crisis that caused more than $1.6 trillion in losses and writedowns worldwide and 7.2 million U.S. job cuts. The financial industry remains lucrative for top managers. Even after the Feinberg-mandated pay cuts, 66 of the executives at the seven companies whose compensation he reviewed will have total long-term compensation of at least $1 million. Bank of America, based in Charlotte, North Carolina, will pay its top employees an average of $6.04 million this year. The 136 workers whose pay Feinberg reviewed got a combined $340 million, or an average of $2.5 million each. AIG paid $165 million in bonuses to employees of the derivatives unit blamed for forcing the insurer to require a government rescue. 

Some banks are already changing their pay practices. Goldman Sachs, which set a Wall Street pay record in 2007, published a three-page set of compensation principles in May that include paying a higher percentage of an employee’s bonus in stock as the pay level increases and deferring the payout of the stock over a period of years. 

Credit Suisse Group AG this week introduced two new mechanisms that ties the bonuses of managing directors to share price performance over four years and returns on equity over three years. One plan adjusts down if the employee’s business unit losses money. The firm, based in Zurich, has also shut down business lines where risk-adjusted returns were too low. The Credit Suisse model may prove a template for rival banks. Hopefully Wall Street will follow that lead.