The Executive Compensation Controversy - Fondazione Rodolfo ...

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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSIS• S. 651, the “Compensation Fairness Act of 2009,” imposed a 70% excise tax (half paidby the employee and half by the employer) for any bonus over $50,000 paid by a TARPfirm.• H.R. 1664, the “Pay for Performance Act of 2009” prohibited any compensationpayment (under existing as well as new plans) if such compensation: (1) is deemed“unreasonable or excessive” by the Secretary of the Treasury; and (2) includes bonusesor retention payments not directly based on approved performance measures. The billalso created a Commission on Executive Compensation to study and report to thePresident and Congress on the compensation arrangements at TARP firms.Most of these bills (H.R. 1518, 1527, 1575, 1577 and S. 651) were either stalled incommittees or failed in a vote. However, H.R. 1586 and H.R. 1664 (the Pay for PerformanceAct of 2009) were passed by the House and sent to the Senate. H.R. 1586 was ultimatelypassed after being stripped of the executive-compensation provisions, while H.R. 1664 is stillawaiting Senate attention. 115While details on the compensation of the five highest-paid executive officers arepublicly disclosed and widely available, banks have historically been highly secretive aboutthe magnitude and distribution of bonuses for its traders and investment bankers. Indeed,since the SEC disclosure rules only apply to executive officers, the banks can have nonofficeremployees making significantly more than the highest-paid officers. Following theMerrill Lynch and AIG revelations, New York Attorney General Andrew Cuomosubpoenaed bonus records from the nine original TARP recipients, arguing that New Yorklaw allows creditors to challenge any payment by a company if the company did not getadequate value in return. His report – published in late July 2009 – was provocatively titled:“No Rhyme or Reason: The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture.”Table 4.1 summarizes the distribution of bonuses for the nine original TARP recipients,based on data from the Cuomo (2009) report. The table shows, for example, that 738Citigroup employees received bonuses over US$1 million (€720,000), and 124 received overUS$3 million (€2.15 million), in a year when the bank lost €20 billion. The 2008 bonuspools exceeded annual earnings in six of the nine banks; in aggregate the banks paid €22.8billion in bonuses while losing €58.5 billion in earnings. Not surprising, the Cuomo reportfurther fueled outrage over Wall Street bonuses on both Main Street and in Washington.115 Without trying to explain (because it is beyond our comprehension), H.R. 1586 was ultimately passed andsigned into law as the “FAA Air Transportation Modernization and Safety Improvement Act,” stripped of anymention of executive bonuses and TARP recipients.-95-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISTable 4.12008 Earnings and Bonus Pools for Eight Original TARP RecipientsCorporation2008Earnings/(Losses)(€bil)2008BonusPool(€bil)$3 mil(€2.2mil)Number of EmployeesReceiving Bonuses Exceeding$2 mil(€1.4mil)$1 mil(€.7mil)Bank of America €2.9 €2.4 28 65 172Bank of New York Mellon €1.0 €0.7 12 22 74Citigroup (€20.0) €2.9 124 176 738Goldman Sachs €1.7 €3.8 212 391 953J P Morgan Chase €4.0 €6.2 >200 1,626Merrill Lynch (€19.8) €2.6 149 696Morgan Stanley €1.2 €3.2 101 189 428State Street Corp €1.3 €0.3 3 8 44Wells Fargo & Co. (€30.8) €0.7 7 22 62Source: Cuomo (2009). Wells Fargo’s losses include losses from Wachovia (acquired in December 2008).The Dodd Amendments were signed into law with the understanding that the USATreasury would work out the implementation details. In June 2009, Treasury issued itsrulings, along with the simultaneous creation of the Office of the Special Master of ExecutiveCompensation. The Special Master (or “Pay Czar”) had wide-ranging authority over allTARP recipients, but was particularly responsible for all compensation paid to the top 25executives in the seven firms deemed to have required “special assistance” from the USAgovernment: Bank of America, Citigroup, AIG, General Motors, Chrysler, and the financingarms of GM and Chrysler. The Special Master released his set of decisions in October 2009.Since taxpayers had become the major stakeholder in the seven “special assistance”firms, the government arguably had a legitimate interest in the firms’ compensation policies.One could imagine, for example, embracing an objective of “maximizing shareholder valuewhile protecting taxpayers,” or perhaps “maximizing taxpayer return on investment.”Ultimately, the Special Master catered to political interests, and adopted an objective ofpunishing the executives in firms responsible for the meltdown by slashing cashcompensation. 116 As shown in Table 4.2, 2009 cash compensation at the three banksregulated by the Special Master were cut by an average of 94%, while total compensationwas cut by an average of 64%.116 In the interests of full disclosure, we note that one of the authors of this report served as one of the SpecialMaster’s two outside advisors. We also note that the fact advice was given does not imply that it was heeded.-96-
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