Corporate Governance

Executive Compensation and the Financial Crisis: A Problem In Search of a Solution (Still) (Part 4)

By J Robert Brown Jr.

During the crisis, some effort was made to change executive compensation practices.  TARP recipients were required to limit their bonuses to a percentage of salary, at least for top officials.  The limits did not include stock.  One possibility, therefore, was that the limits on bonuses would not reduce total compensation but would either result in increased stock awards or increased base salaries. 

In fact, thats what occurred.  With respect to stock bonuses, the CII Study found:

• in the tradition of unintended consequences for compensation regulations, while incentives were capped, salaries, which were not capped, ballooned. Wells Fargo, Citigroup and Bank of America exploited a loophole in ARRA to increase salaries by several hundred percent (salary hikes at Morgan Stanley, JPMorgan and Goldman Sachs were more moderate). In most cases, these salary increases were paid in the form of stock, which became known as salary stock. At Citigroup, salaries rose to between $3,333,333 and $5,333,333 for three named officers. At Bank of America, salaries rose to between $6 million and $9.9 million for four officers. And at Wells Fargo, salaries rose more than 500 percent, to between $3,339,156 and $5,600,000, for four officers, including CEO John Stumpf.  The number of shares paid as salary stock was generally calculated using the fair market value of the stock on the grant date or pay date for the relevant pay period. Such shares vested immediately.

As for base salaries:

• ARRA did not specifically prohibit raising base salaries; indeed there was strong advice to increase base salaries in order to rebalance a compensation package that was too highly incentivized and therefore exposed to too much risk. However, it is more likely that such advice envisaged the kind of increases seen at Morgan Stanley, where already relatively low salaries generally doubled. For example, the salaries of Morgan Stanley's chief legal officer and chief administrative offer jumped from $400,000 to $750,000.

Finally, the CII chronicled some efforts to circumvent the ban by TARP recipients on golden parachutes:

• Some banks found ways around prohibitions that were explicit, namely the ban on golden parachutes. At least three institutions covered by ARRA, none of which however are in this study, paid golden parachutes to departing executives.  For example, a general counsel at AIG received a severance package and Associated Banc-Corp's COO received what the bank termed a 'non-compete' payment that was clearly a golden parachute by another name.

The CII Study viewed the compensation practices instituted under TARP and the practices employed by Ken Feinberg, the Pay Czar, as ineffective.

• ARRA's poorly-written pay restrictions and Feinberg's often questionable advice on pay arguably worsened the situation.  Both the salary loophole in ARRA, which opened the door to massive salary increases, and the pay czar's condoning of 'salary stock,'' sharply boosted fixed compensation at many banks.

In short, the limits on compensation during the crisis were haphazard and did little to restrict total amounts.  At most, they created an incentive to provide a greater percentage of compensation in the form of stock.

Full post as published by The Race to the Bottom on December 16, 2010 (boomark / email).