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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISissued from newly issued shares), provided that the recipient held less than 10% of theoutstanding shares and that the exercise price of the option was at least the grant-date fairmarket value. 108Stock options became modestly controversial in Italy 2001 after revelations that Guccitop executives could make more that €440 million from exercising options in connectionwith an acquisition by Pinault-Printemps-Redoute; the rival bidder (Moet-Hennessy LouisVuitton) described the payments as “monstrously disproportionate.” 109 But, for the most part,limited disclosure of executive pay practice and option exercises muted public controversy.However, in late 2006, the government added restrictions to the favorable tax treatment,requiring that options must not be exercisable for at least three years after grant, andrequiring that executives exercising options hold a portion of the acquired shares for at leastfive years after exercise. 110 As shown in Table 3.11, the use of equity-based pay in Italydropped immediately and significantly after these new requirements.In August 2008, the Italian government formally eliminated the tax advantages forstock options, requiring all options to be taxed as ordinary income upon exercise. However, alast-minute amendment to the decree allowed option exercises to continue to be exempt fromsocial insurance taxes, provided that the executives comply with the five-year holding period.3.4.5. The Rest of EuropeMore to come.4. Pay, Politics, and the Financial Crisis4.1. The USA ExperienceWhile controversies over executive compensation have erupted on occasion fordecades, the eruptions reached Mt. Vesuvius levels in the midst of the financial crisis. In theUSA, the first flash point came in early 2009 when it was revealed the Merrill Lynch had108 As defined under Italian law, the “fair market value” is the average of the closing prices of the companyshares on the relevant stock exchange for each trading day during the month preceding the grant date.109 Johnson, “Gucci chiefs may net $390m,” Financial Times (November 2001, 2001).110 The executive was allowed to sell enough shares to pay the exercise price. See Marshall, “Loss Of TaxExemption For Italian Stock Options Has A Silver Lining,” Mondaq Business Briefing (September 19, 2008).-91-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISpaid bonuses of $1 million (€720,000) or more apiece to nearly 700 employees just ahead ofits acquisition by Bank of America. 111 By 2004, Merrill had become the leading underwriterof mortgage-based collateralized debt obligations (CDOs), and held on to a substantialportion of its own CDOs as an investment. When the mortgage market collapsed, so did thevalue of the CDOs: between July 2007 and July 2008 Merrill lost nearly €14 billion, orabout €38 million daily. 112 Fearing Merrill’s imminent failure, the USA Treasury andFederal Reserve hastily arranged a €36 billion shotgun wedding between Merrill and Bankof America. When Bank of America took the proposed merger agreement to a shareholdervote, it assured shareholders that Merrill could not pay any bonuses without express writtenconsent from Bank of America. What the bank failed to tell shareholders is that it hadalready given Merrill written consent to pay up to €4.2 billion in discretionary year-endbonuses.In December 2009, just before the completion of the merger, Merrill distributed €2.6billion in bonuses to its 36,000 employees; the top 14 bonus recipients received a combined€180 million, while the top 149 received €616 million (Cuomo (2009)). The CEOs of Bankof America and the former Merrill Lynch (neither of whom received a bonus for 2008) werequickly hauled before Congressional panels outraged by the payments, and the AttorneyGeneral of New York launched an investigation to determine if shareholders voting on themerger were misled about both the bonuses and Merrill’s true financial condition. The SECjoined in with its own civil complaint which sued the Bank of America but not its individualexecutives, and the bank agreed to settle for €24 million. However, a few weeks later afederal judge threw out the proposed settlement, insisting that individual executives becharged and claiming that the settlement did “not comport with the most elementary notionsof justice and morality.” 113 In February 2010, the judge relented and approved the settlementafter it had been increased to over €100 million.The original USA bailout bill establishing the “Troubled Asset Relief Program”(“TARP”) was enacted as part of the “Emergency Economic Stabilization Act” (“ESSA”) inOctober 2008 and included what at the time seemed like serious restrictions on executivepay. For example, while Section 304 of the 2002 Sarbanes-Oxley Act required “clawbacks”of certain executive ill-gotten incentive payments, the Act only covered the CEO and chief111 Bray, “Crisis on Wall Street: Merrill Gave $1 Million Each to 700 Of Its Staff,” Wall Street Journal(February 12, 2009), p. C3.112 Story, “Chief Struggles to Revive Merrill Lynch,” New York Times (July 18, 2008).113 Scannell, et al., “Judge Tosses Out Bonus Deal --- SEC Pact With BofA Over Merrill Is Slammed; NewYork Weighs Charges Against Lewis,” Wall Street Journal (September 15, 2009), p. A1.-92-
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