In Praise of Kenneth Feinberg - Commentary by Jeffrey Sonnenfeld

"In Praise of Kenneth Feinberg"
By Jeffrey Sonnenfeld
Published October 26, 2009 in the New York Times DealBook blog 
Read this article in its original context on the New York Times website.

Kenneth R. Feinberg, the Treasury Department’s special master on executive compensation at troubled financial institutions, made headlines last week with pragmatic remedies to surging public outrage over unjustified bonuses to leaders of failed financial firms. Astoundingly, political critics on the left and the right, as well as financial reporters and analysts, have had no problem picking over what Mr. Feinberg did not accomplish.

No, he did not reform the compensation practices of the entire financial world or ensure pay for performance as the new norm across corporate America.

He didn’t prevent reckless risk-taking in financial derivatives. No, he didn’t define the conditions over which the public sector can intrude upon the decision making of private enterprise in free markets. He didn’t explain how pay caps will impact the outflow of talent to higher-paying, healthier firms. He didn’t find work for the 10 percent of Americans officially unemployed. He didn’t bring peace to Afghanistan or find the cure for cancer. He didn’t even tell us how to make more swine flu vaccine.

His mission was a narrow one — to address the supersized bonuses paid to 25 executives at each of seven financial institutions put on life support by American taxpayers through extraordinary, unparalleled public support.

It is hard to find a professional more trusted than Mr. Feinberg — which is perhaps why he is clearly the Walter Cronkite of mediation or a modern-day King Solomon as an implicitly trusted voice of fairness and judgment. He worked as a top aide for such disparate public figures as former Mayor Rudolph W. Giuliani of New York and the late Senator Edward M. Kennedy of Massachusetts. As a mediator, he successfully and quickly resolved disputes involving huge asbestos damage claims, defective contraceptive devices, Vietnam veterans and Agent Orange manufacturers, Attorney General John Ashcroft in the Bush administration and Treasury Secretary Timothy F. Geithner in the Obama administration. He transcends ideology and partisan politics as an ultimate pragmatist.

He also, refreshingly, avoids the opportunities to exploit his position avoiding greed and grandiosity himself. As special master of the September 11 Victim’s Fund, he worked 33 months pro bono on the huge volume of cases requiring patience in a complex regulatory maze and as gut-wrenching, emotionally draining situations as can be imagined. He personally adjudicated the decisions in 1,600 hearings, allocating $7 billion and winning over his harshest critics for his expertise, fairness and sensitivity. On other causes, he has worked pro bono as well, including in the aftermath of the Virginia Tech campus massacre.

Both political parties — the current and past administrations — have come to him for urgent, sensitive, timely, nonbureaucratic, low-key expert problem-solving. One Columbia law professor, John Coffee Jr., has said of Mr. Feinberg, "His natural talent is cutting a deal that everybody can live with."

So what did Mr. Feinberg actually accomplish here? He has established a process for addressing public outrage over the use of taxpayer money for unearned compensation by leaders of failed institutions and a means for examining the incentives required to bring these firms back to independent health.

He has also revealed a set of compensation guidelines that are worth the attention of others. Pay for performance, long-term incentives, princely perquisites and other entitlements of office should not be controversial practices for the nation — except among those few who have come to enjoy them.

He is opposed to pay for retention — paying folks for showing up and breathing, as is the case with the $165 million in retention pay last year at the American International Group’s troubled financial products unit to be followed by another roughly $200 million this year. He believes in paying people well, but this should be based on their performance. The new chief executive could receive $10 million, but only $1 million is salary — the rest is performance based restricted stock. He is opposed to showering princely perks (such as Citigroup’s 2009 plans for a $50 million corporate jet, $10 million in luxurious office décor renovations and fancy club memberships).

Sure, entertainers and professional athletes may earn higher figures — but that is always performance-based. When, in 1930 , people challenged Babe Ruth’s salary of $80,000 for being more than President Herbert Hoover’s salary of $75,000, he replied, “I know, but I had a better year than Hoover!” Bill Gates of Microsoft, Steve Jobs of Apple, Steve Schwarzman of the Blackstone Group and Bernie Marcus of Home Depot did not become billionaires off of retention salaries or taxpayer bailouts but by risks with their own money matched by spectacular performance.

While Mr. Feinberg has a legal mandate to enforce his will going forward, he is not undermining constitutional law over the sanctity of contracts protected since Chief Justice John Marshall’s decision in 1819. But moral suasion can produce results, such as his pressure on Bank of America’s chief executive, Kenneth D. Lewis, to surrender his legal entitlements to any 2009 wages as he was forced down after losing his legitimacy to lead. Similarly, Mr. Feinberg helped inspire the sale of Citigroup’s secretive Phibro energy trading unit to Occidential Petroleum and thus blocking Citigroup itself from paying the head of Phibro, Andrew Hall, $100 million in compensation.

When financiers scream, “Wait, you’re driving our best talent away,” the fears are overstated. Those few who hop to non-American companies may soon find pressures on compensation excesses from the Organization for Economic Cooperation and Development and the Group of 20 industrialized and emerging nations, leading to some parallel practices soon.

Moreover, if some are driven to healthier firms that can pay better, isn’t that the market working well? The market distortion is propping up failing institutions to reward the missteps of their same failed top leaders with lush compensation regardless of performance. The innocent thousands of high-performing professionals on the front lines are not driven away because only the top brass are reined in by Mr. Feinberg. When star talent is lured back at the top, as with A.I.G’s new chief executive, Robert H. Benmoche, fair, attractive compensations levels can be properly determined.

In the worst of all cases, would it be so terrible if some of those Wall Street geniuses — or their potential successor generation — were lured back to science, engineering, and other more productive fields rather than trying to figure out how to out-maneuver financial regulation with complex, intangible formulae for legal shell games. A brilliant, prominent Wall Street billionaire sadly died of a heart problem this month. The brilliant “high-priced” midtown Manhattan cardiothoracic surgeons who work on such Masters of the Universe top out at $500,000 a year or so, while the brilliant Medtronic engineers who design the stents that go into the hearts of such star financiers top out around $75,000. For that matter, President Obama earns $400,000 a year and Chief Justice John G. Roberts Jr. earns a mere $217,000 a year for pretty demanding responsibilities.

At the same time, while he may set a larger moral tone for other institutions to consider, Mr. Feinberg is not grandstanding for social change, and he religiously observes his legal mandate by focusing on only the 25 executives at the helm of each of seven once-troubled institutions who received life saving cash infusions from the taxpayers. It is not a welcome intrusion by corporate management, but one that was necessary, given the poor judgment of top management executives in allowing reckless risk to destroy the independent vitality of their enterprises, while paying themselves billions of dollars in compensation unjustified by their terrible performance.

After investing $85 billion, American taxpayers took 80 percent control of A.I.G. and 34 percent of Citigroup for $25 billion in emergency funds. For $30 billion in bankruptcy financing, the American taxpayers obtained 60 percent ownership of General Motors, with Canadian taxpayers owning 12 percent for their investment of $9.5 billion. Complaining about this taxpayer control over wages is like complaining over public scrutiny over the wages of Postmaster General Jack Potter. He may suffer almost more painful decisions of more lasting historic impact than any of these leaders of troubled, bailed-out firms. These leaders of "hybrid" business are not the independent captains of vibrant private industry but, in fact, also bear some similarities to civil servants.

While Mr. Feinberg is very concerned about Wall Street’s tin ear towards the moral outrage of Main Street, he does not assume the imperial aura of a "czar." He even jokes that his Latvian grandmother would have been horrified by the casual use of the frightening position title of "czar!"

The "pay czar" should not speak to the appropriate levels of compensation for healthy, independent private enterprise — no matter how tempting it may be to address often apparently wrong-headed decisions of other boards. The corporate governance mechanisms of those enterprises should not be intruded upon if the business has not taken on government assistance nor worked in an unlawful manner. Companies should be allowed to make wrong strategic, compensation, product, staffing, production and other such decisions without micromanagement by the public sector.

Certainly, there is symbolic and moral codes of conduct and appropriateness modeled here, but private compensation decisions for all firms cannot be guided by legal and regal decrees of czars — or even by the confusion of crude city council-like ceremonial “say on pay” votes in a carnival atmosphere by distant shareholders who will never be involved in the hiring packages, where most of the damage is done. For appropriate larger impact, boards of directors must be more courageous and have "backbone" to say no to such unjustified greed as we have seen. The best way to do this is to more fully empower the voice of shareholders — the actual owners of the enterprise — with such vital mechanisms as the power to elect directors with simple majority votes.

Of course, there is one more missing ingredient that transcends pay czars, regulation, and even diligent board governance. That is professional honor. Robert Willumstad stepped down as president of Citigroup in 2005 in career frustration, hoping to be a chief executive somewhere else with his path blocked at Citigroup . It was not until June 2008 that his ambition was answered with the position of chief executive of A.I.G. following the ouster of Martin Sullivan. Barely three months later, just as he was developing remedial responses to A.I.G. problems that predated him, then-Treasury Secretary Henry M. Paulson Jr. forced his replacement by a Goldman Sachs board member, Edward M. Liddy, a former insurance chief executive. Mr. Willumstad, though again suffering a career frustration, again left with quiet dignity. While entitled to a $22 million exit package, he voluntarily walked away, leaving it on the table.

Jeffrey Sonnenfeld is the Lester Crown Professor in the Practice of Management at the Yale School of Management and president of the Yale Chief Executive Leadership Institute.