SEC regulations for public companies say that compensation committees for the boards at public companies recommend pay for senior managers and those recommendations are then given to the entire board of directors for approval. The information is reported in every proxy along with the methods used to arrive at compensation of top officers.

Pay czar Kenneth Feinberg plans to take the power of setting management compensation away from the boards of directors at the financial firms that owe the government money which destroys a great deal of the reason that public company boards exist at all.

According to The Wall Street Journal, Feinberg will set compensation for the top people at the Wall St. firms that have not paid back the capital that they received during the credit crisis so that cash salaries are cut. In the place of cash payments, Feinberg will give managers stock which they will have to hold for a long period, perhaps years.

One unintended consequence of the plan which has been mentioned often in the past is that the very best people at the firms with restricted pay will go to hedge funds and other private money management firms that have no compensation restrictions.

The greater issue is the role of  boards which are elected by shareholders of these public companies. The government does own 34% of Citigroup (NYSE:C), but Feinberg’s plan would strip its shareholders and the board that the shareholders elect of  the critical power that they have to control and direct management performance through compensation incentives.

The irony of  Feinberg’s plan is that the boards of the most troubled financial firms were “appointed” by the government. Almost the entire board of Bank of America (NYSE:BAC) has been replaced by candidates that the Treasury approved. These directors, put into place to make sure that taxpayer interests are served, are now being stripped of a great deal of the power that they have to do that job.

The Wall St. companies that still owe the  government money have new boards approved by the government and their decisions will be undermined by a pay czar appointed by the government. It is hard to say whose interests are served by that system.

Douglas A. McIntyre

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