Wall Street fumes over moves to cut pay
Measures ‘will hurt the very firms the US seeks to save’ Compensation ‘must be in line with strategy of companies’
THE MOVES of the White House to rein in executive pay sparked criticism on Wall Street last week as lenders such as Bank of America said the measures might hurt the very firms the US intends to save.
“People want to work here but they want to be paid fairly,” said Scott Silvestri, a spokesman for Bank of America, the recipient of $45 billion (R335bn) of bailout funds. Rivals were “identifying our top performers and using pay concerns to recruit them away for fair-market compensation”, he said.
Kenneth Feinberg, the Treasury Department’s special master on compensation, said on Thursday that he had slashed total pay at firms including Bank of America, Citigroup and American International by as much as 50 percent.
The Federal Reserve, which is moving in tandem, announced guidelines aimed at making bank compensation more tied to risk management.
Together, the measures are meant to address what President Barack Obama’s administration calls unchecked risk-taking fuelled by excessive pay. The credit-market meltdown that followed led to a financial crisis that caused more than $1.6 trillion in losses and writedowns worldwide and 7.2 million US job cuts.
Bailed-out companies had brought the crackdown on themselves, said Stuart Grant, an investor lawyer and the managing director at Grant & Eisenhofer in Delaware.
“What should have happened is the boards of directors at these companies should have been setting compensation in a way that was appropriate in size and incentive and in risk,” Grant said. “It’s horrible, but it was inevitable and it was their own damn fault.”
The financial industry remains lucrative for top managers.
Even after the Feinberg-mandated pay cuts, 66 of the executives at the seven companies whose compensation he reviewed will have total long-term compensation of at least $1 million. Bank of America, based in North Carolina, will pay its top employees an average of $6.04m this year. The 136 workers whose pay Feinberg reviewed got a combined $340m, or an average of $2.5m each.
At AIG, the New York-based insurer that took a federal bailout valued at $182bn, chief executive Robert Benmosche sought to assure employees they would not be forced by the Obama administration to return pay they have already collected.
“Mr Feinberg does not have jurisdiction over the vast majority of AIG employees,” Benmosche said in a memo to AIG workers last week. Feinberg had already approved Benmosche’s own $10.5m compensation package.
AIG paid $165m in bonuses to employees at the derivatives unit blamed for forcing the insurer to require a government rescue. Legislators lashed out at Goldman Sachs in July when the New York-based bank set aside a record $11.4bn for pay and benefits in the first half of this year.
Some banks are already changing their pay practices.
Goldman Sachs, which set a Wall Street pay record in 2007, published a three-page set of compensation principles in May that include paying a higher percentage of an employee’s bonus in stock as the pay level increases and deferring the payout of the stock over a period of years. The company also said it did not believe in granting employees guaranteed bonuses for more than a single year.
Chief executive Lloyd Blankfein, who was awarded a record-setting $68.5m in salary and bonus for 2007, said in an April speech that the industry’s compensation decisions before the crisis “look greedy and self-serving in hindsight”. A Goldman Sachs spokesman did not reply to a request for comment yesterday.
Credit Suisse last week introduced two new mechanisms that tie the bonuses of managing directors to share price performance over four years and returns on equity over three years.
One plan adjusts down if the employee’s business unit loses money. The firm, based in Zurich, has also shut down business lines where risk-adjusted returns were too low.
“We have closed down some businesses that had very good profit potential but the returns weren’t there given the risks, like commercial mortgage-backed securities,” Paul Calello, the chief executive of the firm’s investment banking unit and a member of the executive board, said in an interview on Thursday.
Compensation “needs to be aligned with the strategy of the firm”, he added.
The Credit Suisse model may prove a template for rival banks, said Mark Poerio, a partner focusing on compensation at Paul, Hastings, Janofsky & Walker in Washington. “Hopefully Wall Street will follow that lead,” he said.
Feinberg’s reductions in the cash portion of executives’ salaries apply to compensation earned by employees for November and December and will be revisited at the start of next year, Feinberg said.
He was not seeking to claw back salary or bonuses already paid this year. The reductions, while only covering two months, were important because they were the starting point for negotiations on next year’s pay.
The pay cuts were “sheer stupidity”, said Kenneth Langone, the cofounder of Home Depot and a former New York Stock Exchange board member.
“The taxpayers have an enormous financial risk in these companies, and very simply stated, I want the best person. If I needed neurosurgery, I would want the finest doctor I could get, no matter what I had to pay for it.” – Bloomberg