“The Amer­i­can peo­ple are an­gry about ex­ec­u­tive com­pen­sa­tion – and rightly so. No one un­der­stands pay for fail­ure.”

Finweek English Edition - - Cover -

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.¤

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