Big cheeses lined their pockets before the calamity hit Wall Street. Meanwhile, the government’s attempts to curb the excesses struggle to keep up with the machinations of the big companies.
The compensation tally depends how it is calculated from bonuses, options and perks. Here are some Bloomberg reports of five-year packages: At Merrill Lynch, Stan O’Neal pocketed $172m (£99m), at Bear Stearns Jimmy Cayne picked up $161m, while at Morgan Stanley, John Mack and Philip Purcell, the chief executive officers (CEOs) together reaped $194. Note, of course, that Hank Paulson (pictured, right) in his day took in $111m from 2003-06 at Goldman Sachs. Merrill’s O’Neal and Citi’s Chuck Prince parachuted out with $161m and $60m, respectively. Although we hear Dick Fuld (pictured, above) was punched and knocked out at the Lehman gym shortly after his firm declared bankruptcy, he has nonetheless taken home some $480m since 2000.
The mob may storm, but it is too late for retribution. Executives enjoyed a long enough bull run to stash away ample funds for rainy days. Pay was so high that CEOs like Cayne, who saw their net worth shrink from hundreds of millions to tens, had already amassed a sufficient nest egg to insure against losses.
There is blame enough to go round, from corporate boards, to the accounting industry, to the executives themselves. Many of the big firms, like Bear Stearns, Lehman and Merrill, have moved from partnership structures to public corporations. “As partnerships they rewarded only the partners, who had equity stakes in the firm. Becoming public, they had shareholders, as stakeholders to worry about,” explains Paul Hodgson, senior researcher at The Corporate Library. To make matters worse, compensation designed around options only created incentives for excessive risk taking. Option holders found themselves gambling with “house” money, since their options remained untaxed until they were cashed in.
Katie Couric only earns $15m So far, government reform has proceeded three steps forward and two steps back. Companies have been adept at finding loopholes and devising new payment methods.
For example, in 1993, Congress limited tax-exempt remuneration to $1m. What happened? That number became the new floor, and boards found they could not attract top candidates for less. Other firms ignored the tax cost, paid more, and the shareholders were the ones who lost out.
But companies have other aces up their sleeves. Wall Street could start juggling roles and titles. According to an SEC requirement, the CEO, CFO and next three highest paid executives’ compensation must be reported on the proxy statement. The rule was nicknamed the ‘Kay Couric Clause’, after American television’s highest paid anchor (pictured). “To prevent future caps, firms could start calling their top producers and executives by titles like relationship manager,” suggests Josh Bewlay, a consultant at Compensation Resources.
At first, Henry Paulson balked at pay restrictions, arguing that they might discourage banks from participating in his bail-out. Others fretted that the best and brightest might flee the industry. Whither? To hedge funds or private equity? Back to medical school? Considering the havoc those luminaries have wrought, we might settle for the second best.
Plastering overThe Paulson bail-out, aka rescue legislation, ended up tackling compensation through corporate governance and tax provisions. It contains the general mandate that no compensation package should promote “taking of unnecessary and excessive risk”. What on earth does that mean? Good luck to boards, trying to interpret it. In addition, the new law extends the Sarbanes Oxley (SOX) provisions, designed in 2002 to allow companies to claw back money from executives who have engaged in misconduct or earnings manipulation. Ever since SOX, Congressionalist activists have wanted to broaden the language beyond accounting. “This is window dressing, a trial run intended to put down some kind of marker. It won’t be used, except in egregious cases. Next year, Congress may add teeth,” predicts John O’Neill, a legislative partner at Venable, who previously served as tax and benefits counsel to the Senate Finance Committee for three years.
In the past 15 years, compensation has followed performance. While that idea sounds sensible in principle, the metrics are all over the map. Kevin Nussbaum, the president of CBIZ Human Capital Services, thinks we need to use universal yardsticks more openly, like return on equity, earnings or revenue growth. If the sports industry can do it for their teams and stars, why not banks and insurers? In soccer, baseball or tennis, we all know the players’ salaries and the rules of the game. One hitch, however, would be that companies are at different phases in their cycles. Take Bank of America, points out Hodgson, which has recently acquired four banks, and will take time to turn them around profitably.
There are many ways to skin a cat, even a fat one. The government has already come down hard on not-for-profit organisations. The requirements sound vanilla enough: compensation packages must be approved by independent directors, be guided by outside data and counsel, and be documented before enactment. The crunch comes with the severe penalties for board members, and executives who fail to disgorge within 60 days.
“We need to clean up the proxy process,” says Nussbaum. Today, shareholders can approve an option plan but little else. “Say on pay” measures, which give shareholders a nonbinding vote on compensation, might be a first step, although those have not worked particularly well in Britain, where they are already in force, and the cats keep getting plumper.
Clawbacks may prove the focal point, for satisfying public wrath and promoting executive prudence. If CEOs could be held to a legal fiduciary standard, bound to act in the sole interests of shareholders, it might be easier to bring and win lawsuits, and some of those palazzos might go back on the block.