Pay Czar

What Was the Pay Czar?

"Pay czar" was the moniker given to Special Master for Executive Compensation Kenneth Feinberg. The job of the Special Master for Executive Compensation was to monitor compensation paid to executives of firms that received funds under the U.S. Troubled Asset Relief Program (TARP), which rescued several companies, including banks, during the 2008 financial crisis.

Grasping the Pay Czar

The U.S. financial system experienced a major credit crisis because of the 2008 financial crisis. Many banks foreclosed on mortgages when homeowners defaulted on their payments. Accordingly, financial institutions were attempting to make due. The stock market, along with the economy, went into free fall, and toward the finish of 2008, panic was wild.

The Troubled Asset Relief Program (TARP) was made by the U.S. Treasury Department during the financial crisis. TARP was enacted by President George W. Bush on October 3, 2008, as part of the Emergency Economic Stabilization Act. More than $400 billion was allocated to balance out banks, credit markets, and a few corporations. TARP was additionally intended to support the financial markets, encourage lending, and keep financial institutions from failing. Without the government paying taxpayer money to these companies that became indebted during the crisis, many would have needed to close. The government feared the economic effects on the off chance that large firms closed their entryways and considered these companies "too big to fail."

Since the companies had caused problems and were presently getting taxpayer money, a pay czar was designated to investigate the compensation paid to executives of these companies to keep them from exploiting the taxpayers. The term "pay czar" was applied to Kenneth Feinberg following his arrangement by the U.S. Treasury Department to monitor these compensation awards to executives of TARP beneficiaries.

Albeit the pay czar made recommendations on executive pay, these were non-binding and advisory, meaning the pay czar had no legal authority to make a binding ruling on executive compensation.

Job of the Pay Czar

Following the disbursal of TARP funds to a portion of the country's largest financial institutions and organizations, numerous in the media and overall population became furious over the extreme bonuses being given to the executives of these rescued institutions. Thusly, the position of Special Master for Executive Compensation was made to direct such awards.

The primary obligations of the pay czar were to determine on the off chance that certain employees of a TARP beneficiary had received outstanding financial assistance. Companies that received TARP assistance included:

General Motors Co. (GM)
Partner Financial (formerly GMAC) (ALLY)
Chrysler and Chrysler Financial
AIG or American International Group Inc. (AIG)
Bank of America Corporation (BAC)
Citigroup Inc. (C)

Kenneth Feinberg was required to determine the compensation for the best 25 executives of companies that were TARP beneficiaries. In spite of the fact that Feinberg didn't rule over individual payments for every executive, he was required to make determinations of the compensation structures of 75 extra employees along with the best 25 executives. The pay czar needed to balance the need to safeguard the public interest while additionally permitting companies to compensate their employees in a fitting way.

The Pay Czar's Compensation Standards

In determining whether compensation fulfilled the public guideline, the pay czar zeroed in on the accompanying regions:

Risk

The compensation structure at a company could not have incentives that encouraged the employees and executives to face inordinate challenges that could compromise the stability of the company. This remembered any short-term increments for performance-based pay that may be granted through compensation that could subvert the long-term growth and soundness of the company.

Taxpayer Return

The compensation ought to mirror the requirement for the company to stay competitive and enroll skilled employees so the company or TARP beneficiary could pay back its financial obligations to the government.

Suitable Allocation

The compensation structure must be allocated such that zeroed in on both short-term and long-term performance incentives. These incentives included contributions to pensions and cash incentives. The performance-based incentive additionally must be significant and reachable so the employee had an incentive to accomplish their goal. The performance additionally must be tied to the performance of the company or the division.

Comparable Compensation

The compensation structure should have been consistent and not extreme compared to different companies or comparative positions or jobs inside different companies.

Employee Compensation versus TARP Value

The pay for every employee needed to mirror the contributions of that employee to the value of the company, which could incorporate revenue generation, risk management, and corporate leadership. Company policies and regulations needed to likewise be considered and whether the employee was contributing in such a way that was significant to the company, which eventually assisted the TARP beneficiary with repaying the taxpayer.

Income Guidelines

The pay czar disapproved of guaranteed bonuses, and limited compensation to $500,000 each year and any excess compensation was tied to performance. The incentive pay was to be delivered in a mix of stock (or equity) and cash yet additionally contained a clawback provision considering the income to be pulled back on the off chance that it was considered wrong. Additionally, huge measures of pay were not to be allocated to executives that were not performance-based and were challenging for shareholders to determine their value, including incentives inside executive retirement plans.

Features

The Special Master for Executive Compensation was to monitor compensation for executives of firms that received taxpayer money by means of the TARP.
"Pay czar" was the moniker given to Special Master for Executive Compensation Kenneth Feinberg during the 2008 financial crisis.
Kenneth Feinberg was named to examine the compensation for the best 25 executives as well as 75 different employees of TARP beneficiaries.