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executive compensation

Obama Caps Exec Pay in Bailout Plan: Will It Make a Difference?

February 5, 2009 · 5 comments

Taxpayers have been crying foul for weeks now after it was revealed that executives of failing financial institutions were still being rewarded with extraordinary pay outs. How big were the pay outs? If you include stock options, bonuses and perks, the chief executives of 10 banks which received $161 billion in federal bailout money took home a cool $200 million – or $20 million each. Not bad for running a company or two into the ground (note to banks who are hiring: I will offer to run your company into the ground for a quarter of that).

Notably, Bank of America Chief Executive Ken Lewis earned a base salary of $1.5 million plus nearly $20 million more in “extras” in 2007. Vikram Pandit, the head of the beleaguered Citigroup, was said to have received a salary of $250,000 plus double that in “extras” in 2007 and total compensation of $573,813; the Wall Street Journal, however, claims that SEC and other filings put his compensation at closer $5.66 million for 2007. That’s still less than his predecessor, Charles Prince III, who as chairman and CEO of Citigroup received nearly $26 million in total compensation in the prior year. And good ol’ Martin Sullivan, who was ousted from AIG last year, still made out just fine: the British-born businessman took home $14.3 million in salary and compensation in 2007. For more information, you can check out this list of compensation for top bank executives as compiled by CNN.

All totaled, estimates are that Wall Street bonuses topped $18 billion for failing companies in 2008.

To put it into perspective, that translates into 1,321,197 full time wages for the year at the minimum wage rate of $6.55/hour. Yep, the equivalent of more than one million jobs low wage earning jobs. If you use the average wage (nationally) as determined by SSA and DOL wage data, it works out to 485,463 full time jobs for the year.

Nonsensical for sure and more than just a little offensive to most taxpayers who are finding it difficult to make ends meet.

In an effort to stave off complaints from ordinary taxpayers – those same taxpayers that have been called upon to “make sacrifices” – President Obama has announced that executives of companies receiving “exceptional assistance” in the way of federal bailout money will have their pay capped at $500,000 annually. Companies that want to pay their top executives more than $500,000 can issue restricted stocks that cannot be sold until money borrow from the government bailout plan is repaid. The new rules will also require banks to allow shareholders of financial institutions to have more say about executive compensation. The plan will also mandate greater transparency for discretionary spending such as holiday parties (remember the $440,000 bash at a California spa for AIG execs a mere week after the bailout was approved?) and office renovations (no more $35,000 toilets for Merrill Lynch execs?).

And the rules are, of course, prospective. That means that they would apply to future TARP assistance. We wouldn’t want to muck up what’s already in place – we blew that chance already.

So now everybody’s happy, right?

Um, not so fast.

There are a lot of issues to consider. For one, even though this feels like a good idea, do we really want this level of government intervention into what we’re at least pretending, for now, is the open market? And what are the penalties for failing to comply with the new rules? I haven’t heard much talk about penalties. Is it a dollar amount? Or, like a stern father, will we just threaten to “cut the banks off” from further borrowing? Will compensation in excess of $500,000 mean that the loans are called immediately? For the full amount? So many questions. And I’m not sure that I want to know the answers. Because the answers mean that we’re getting closer and closer to being the boss of the banks. And goodness knows, we really don’t want that.

And what qualifies as discretionary spending? No more bashes, we get that. But what else? Citibank has agreed to drop its plans for a new private jet but they may still be clinging to naming rights that they worked out with the Mets for their new stadium. And while I’d like for this corporate name stickering to stop (c’mon, the Mets can afford Beltran but they need corporate sponsorship to build a new stadium), I have to think that interfering in private contracts isn’t the best way to govern. The Mets say that they are “fully committed to our contract with Citi,” according to Mets spokesman Jay Horwitz. Of course they are. They’re on the good end of the deal. But Citi? Not so much. They’re kind of damned if they do and damned if they don’t. Again, not a fan of Citi (or the Mets – Go Phillies!) but I don’t know that we should be forcing companies to undo deals that they’ve negotiated.

Of course, there’s the argument that it’s our money. You know, since it’s a loan. But that’s kind of a scary road to go down. If you take a personal loan from one of these banks, do you want really them monitoring your spending on every dollar? It’s kind of like when your dad loans you money and then questions whether the purchase of new shoes was the best way to go (not that I remotely know of where I speak… ahem).

There’s just so much going on here with the loans and the rules and spending…

I have the real answer. It’s incredibly simple. And yet, apparently too complicated a concept for the CEOs of big banks to grasp. Try being accountable and responsible. Then government wouldn’t need to monitor anything – but then, if they had done that in the first place, they likely wouldn’t be begging for money now.

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Coming in for a Landing: What the Heck is a Golden Parachute?

October 6, 2008 · 4 comments

In the midst of all of the chatter about the economic fiasco bailout package, the term “golden parachute” has been bandied about quite a bit. Most folks know it has something to do with executive compensation – but what the heck is it?

A golden parachute is an agreement between a company and an employee that allows for compensation and benefits at the employee’s termination, usually when control of the company changes. Since most companies aren’t eager to extend benefits to employees like you and I on termination, the term really applies to executives – they’re the ones with leverage to make these kinds of demands.

Companies agree to these packages as a way of attracting and retaining candidates for executive positions. Executives like them because they rarely include a requirement that the executive perform well in order to be compensated (see AIG, Bear Stearns, etc.).

The term was traditionally used as a specific clause which would provide a pay-out in the case that the company was acquired – the idea was that the “parachute” would cushion the fall. The first time the term was used in corporate history referred to the takeover of TWA airlines. In 1961, as creditors tried to push out Howard Hughes, Charles C. Tillinghast Jr. was guaranteed a significant pay out in the event that Hughes remained in control of TWA. The concern was that Hughes would fire Tillinghast out of revenge; Tillinghast stayed at TWA for 15 more years.

Since the days of Tillinghast, the trigger events for golden parachute payments have changed. In most cases, the shift of control need not be hostile (friendly takeovers and mergers may cause a trigger) and indeed, the numbers of shares changing hands need not be a majority. Even though the trigger events are becoming more lax, the payouts are getting bigger.

One of the most famous golden parachute compensation packages in recent years belonged to Senator McCain’s economic advisor, Carly Fiorina. Under Fiorina’s watch as CEO of Hewlett-Packard, corporate shares plummeted more than 50% and the company suffered huge job losses. Fiorina was fired in 2005. She received $21 million in severance pay after her firing and an additional $21 million in stock options and pension benefits, bringing her total payout to $42 million. As a result of the payout, company shareholders filed suit against both Hewlett Packard and Fiorina personally, hoping to salvage some of the funds paid out to Fiorina.

Other notable golden parachute payouts?

Angelo Mozilo of Countrywide was entitled to a $37.5 million severance package when Countrywide was acquired by Bank of America. He didn’t take the severance after bowing to public pressure but did cash in stock options, walking away with an estimated $129 million. Mozilo was (in)famous for complaining about opposition to his compensation in an email that read:

Boards have been placed under enormous pressure by the left-wing anti-business press and the envious leaders of unions and other so-called “C.E.O. Comp Watchers.”

Richard Fuld of Lehman Brothers received about $22 million as a severance package when Lehman was sold. He also redeemed nearly half a billion – $490 million – worth of stock. The New York Times has placed his compensation for ruining the company at $17,000/hour.

Kerry Killinger of WaMu received $44 million in September when he left office. Alan Fishman took over for him and worked less than three weeks before the economic collapse. He is expected to walk away with between $16 and $20 million for less than a month’s worth of work.

Similarly, at Wachovia, Ken Thompson received $5 million in severance when he was voted out this year; he had pocketed nearly $30 million in stock and options during the prior two years. His replacement, who was on the job for about 3 months prior to the bids by Wells Fargo and Citibank, stands to leave with up to $12 million.

And who lost out on the golden parachutes? Bowing to public pressure and government scrutiny, the Federal Housing Finance Agency refused to reward CEOs that killed their companies. Daniel Mudd of Fannie Mae was denied his golden parachute by the FHFA. Similarly, Richard Syron of Freddie Mac, was also denied a significant severance.

What are the tax consequences for these plans? Congress has actually imposed serious tax consequences in an effort to limit the use of the plans (psst, Congress, it’s not working). Excise taxes of an additional 20% or so are added to income tax in the case of plans that are considered excessive. Excessive plans are those with packages which exceed “normal” compensation by a factor of three. So, of course, instead of limiting exit compensation to three times normal compensation, executives generally bargain with the tax bite in mind… if you want to net $20 million, you request $25 million.

But (and you knew there was a but) payments to or from some qualified plans, such as pension, profit-sharing and stock bonus plan plans, are exempt from tax penalties. Additionally, if you take a peek at the compensation packages for most of these CEOs, you’ll see that a lot of the payout came in the form of stocks and options paid out in the year prior to ousting. This is not surprising; it’s an additional way of limiting the company’s exposure to tax under the golden parachute rules, which imposes restrictions on the timing of payments.

Congress has also deemed golden parachute payments not deductible to the employer, unlike regular wages – the result of which is that the shareholders, not the executive, gets hit. Excise taxes paid by the executive are not deductible to the recipient, but then that’s not really a problem since most federal income taxes are not deductible to taxpayers anyway.

The rules and exemptions under the plans are extensive. I can barely wade through them myself after an entire semester of the tax benefits of employee compensation… But that’s why these companies have armies of tax professionals on their side, hoping to limit their tax consequences and make their executives happy. So far, what appears to have happened is that executives are getting a whole lot of payments for nothing… Tax laws have not served as a deterrent to excessive payments as Congress might have hoped. Perhaps outside of the bailout package, some additional restrictions are in order? I sure hope so.

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