“The American people are angry about executive compensation – and rightly so. No one understands pay for failure.”
SHAREHOLDERS worldwide have been left seething as titans of business in the United States, who allowed risk to permeate the global financial system, have ridden off into early retirement considerably enriched by severance payments from the carnage they helped create.
When Merrill Lynch’s Stan O’Neal was ditched in late 2007 for failing to rein in the risk that ultimately led to his group’s takeover by Bank of America, he took shares and options worth US$161m with him at the time, Citigroup’s Chuck Prince took nearly $40m and even Lehman Brothers’ Dick Fuld, whose bank was bust, took $35m. Martin Sullivan, CE of AIG, received $14m before the Federal government rescued the insurance group.
However, the experience wasn’t universal. Though Daniel Mudd and Richard Syron – the CEOs of Fannie Mae and Freddie Mac, respectively – weren’t allowed severance payments, they did leave with nearly $10m in retirement benefits.
American shareholders are grappling with questions about how executives who spent much of this decade building up toxic assets and bringing the world to the edge of financial calamity could be paid vast bonuses for doing so.
One of the great ironies of the Lehman Brothers’ collapse is the fact that some of the people involved in the financial chicanery that eventually led to its collapse stand to make millions mopping up the mess they helped create.
London’s The Times newspaper reported that the bill to retain staff to unwind trades and complex structures would be picked up by Japanese bank Nomura, which bought large chunks of the failed group. More than 150 Lehman fixed income staff benefited from three-month contracts designed to clean up positions that had been taken. The administrator of the business guaranteed staff 50% of their total 2007 compensation and up to 100% if the positions could be unwound profitably.
US Treasury Secretary Hank Paulson – himself once a generously remunerated Wall Street wheeler-dealer – was forced to concede: “The American people are angry about executive compensation – and rightly so. No one understands pay for failure.”
The fallout on Wall Street has seen both Democrats and Republicans in Congress insist that the emergency multi-billion dollar bail-out of the US financial sector comes with considerable restrictions with regard to executive pay.
Earlier this year, Bank of England Governor Mervyn King warned that pay and bonus levels in the City of London posed two significant threats: the first, that it would encourage bankers to take unacceptable levels of risk; the second, that the promise of great riches was diverting many graduates from industry.
It emerged last week that the new CEO of Royal Bank of Scotland (RBS), Stephen Hester, had been hired at a salary of £1,2m and had been awarded shares worth more than £6m to overhaul the bank. His primary focus: to undo
much of the expansion embarked upon by Sir Fred Goodwin, its outgoing boss. Thanks to the Gordon Brown government’s bailout plans and the group’s £20bn fundraising, British taxpayers will own up to 60% of RBS.
One of the conditions of the bail-out has been that executives at troubled British banks that take government money, forego their annual incentive bonuses. Barclays, the controlling shareholder in South Africa’s Absa, has done its utmost to raise capital elsewhere, ensuring its executives don’t face the same onerous crackdown.
Not that working for the bailed out banks is going to be the equivalent of working for a non-profit organisation. Performance-related, long-term incentives do remain in place. The shares issued to Hester are at 65p, the same price at which Britain’s government is backing the fundraising. If Hester manages to restore RBS to its former glory, he stands to benefit handsomely. Unlike some American executives, Goodwin, RBS’s outgoing CEO, has waived his right to a settlement on his departure at end-January 2009.
Britain’s left-wing The Guardian newspaper’s annual pay survey found the global economic slowdown had in fact put the brakes on executive pay. While it found that growth rates had slowed, its research pointed to a growing gap between the executives of Britain’s leading companies and a super-wealthy elite at the top of the earnings pile whose salaries continue to stretch ahead.
The Guardian’s 2002 pay survey found there were only six directors in the FTSE 100 earning more than £5m. This year the 10th best paid executive of an FTSE 100 company earned £8,2m. His name? Brad Mills, former CEO of Lonmin, a company also listed on the JSE.
The highest paid directors in Britain are focused on financial services and the mining sectors. In SA, Mabili’s 2008 Directors’ Remuneration Report identified financials as leading the domestic sector in terms of pay: it was marginally higher than the mining sector.
The highly incentivised nature of the banking sector has made it the most lucrative place to work.¤