After Losses, a Move to Reclaim Executives' Pay - 22 Feb 2009

February 22nd, 2009 8:07 am

After Losses, a Move to Reclaim Executives' Pay

By Gretchen Morgenson / New York Times

SHOULD executives get to keep lavish pay packages when the profits that generated their compensation go up in smoke?

As the financial crisis deepens, what might have been a philosophical
question is now the topic of the day. With losses mounting at the
nation's largest financial institutions, years of earnings have been
erased, investors have lost billions, thousands of employees have been
let go, and taxpayers have been tapped to rescue the financial system.
But executives who helped set the problems in motion, or ignored them
as they mounted, are still doing fine. Humbled, perhaps, but well paid
for their anguish.

Executives at seven major financial institutions that have
collapsed, were sold at distressed prices or are in deep to the
taxpayer received $464 million in performance pay since 2005, according
to an analysis performed for The New York Times. Almost half of that
consisted of cash compensation.

Yet these firms have reported losses of $107 billion since
2007, a result of their own missteps and the ensuing economic downturn.
And $740 billion in stock market value has been lost since these
companies' shares peaked in 2007, just before the housing bubble burst.

Against that landscape, a growing chorus is demanding that
executive compensation snared shortly before problems emerged be given
back.

"There is a line that separates fair compensation from stealing
from shareholders," said Frederick E. Rowe, a money manager in Dallas
and a founder of Investors for Director Accountability, a nonprofit
group. "When managements ignore that line or can't see it, then hell,
yes, they should be required to give the money back."

Corporate boards that awarded lush executive pay packages
almost always justified them by saying they encouraged superior
performance and were directly tied to benchmarks like profitability.

But now, with a public backlash against excessive pay and
taxpayer lifelines extended to crippled companies, the idea of
recouping compensation, known as "clawback," is gaining traction.

Currently there is no legal mechanism for forcing the
regurgitation of past pay, so such efforts would need to be bolstered
by new legislation. Clawbacks also promise to be a hot-button issue at
shareholder meetings in coming months.

Representative Henry A. Waxman, the California Democrat who
heads the House Committee on Oversight and Government Reform, has
called for recovery of executive pay at companies that collapse. He
posed this question to financial executives testifying before Congress
last March: "When companies fail to perform, should they give millions
of dollars to their senior executives?"

The seven troubled companies whose executives received almost
$500 million in performance pay since 2005 are the American
International Group, Bear Stearns, Citigroup, Countrywide Financial,
Lehman Brothers, Merrill Lynch and Washington Mutual. Equilar, a
compensation research firm, conducted the analysis of executive pay and
earnings at these and other companies for The Times.

Analysts say that 2005 is a useful milestone because dubious
lending started sweeping across the nation that year, and toxic assets
began piling up at banks and other firms.

MANY of the chief executives who oversaw troubled financial
institutions have exited the scene. And several of the companies that
Equilar studied are no longer independent. Merrill, Countrywide, Bear
Stearns and Washington Mutual have been absorbed by competitors, while
Lehman collapsed.

Trying to get out in front of the compensation backlash, some
executives are refusing bonuses and limiting their salaries. Vikram S.
Pandit, Citigroup's C.E.O., recently said he would take a salary of $1
and would receive no bonuses until his troubled bank turned a profit.
He has not received any performance pay since he took over the top job
at Citigroup late in 2007.

The seven companies highlighted in the Equilar study are not
the only financial firms that turned in woeful results recently. Even
companies that have managed to generate profits — Wells Fargo, Morgan
Stanley and Bank of America are three examples — have received taxpayer
aid. Executives at these companies, too, face shareholders angered by
battered stock prices.

Because the Equilar study uses only profitability as a basis
for comparison among firms, it offers a relatively conservative look at
how much pay might have been unfairly awarded.

For example, the analysis of the seven companies — among the
most damaged on Wall Street — doesn't take into account the pay of
executives who left the scene after overseeing corporate practices that
eventually caused their companies to careen off the rails.

Sanford I. Weill, for example, Citigroup's chief architect,
received $205 million in performance pay in the four years before he
handed over the reins to Charles O. Prince in 2003.

Analysts contend that Mr. Weill's failure to effectively manage
and knit together the financial behemoth he created in 1998 led
directly to Citigroup's woes today. A spokesman for Mr. Weill said that
Citigroup was profitable and financially healthy when he ran it. He
noted that Mr. Weill has dropped a consulting arrangement with the
bank, as well as use of its corporate aircraft, because of Citigroup's
woes.

Matching compensation to actual, long-term profitability at other firms is revealing.

Consider Merrill, which Bank of America bought in a distress
sale arranged last fall. Losses reported by Merrill as a result of the
credit crisis totaled $35.8 billion in 2007 and 2008, enough to wipe
out 11 years of earnings previously reported by the company. The losses
dwarf those reported by any of the other companies that Equilar
analyzed.

For the 11-year period from 1997 to 2008, Merrill's board gave
its chief executives more than $240 million in performance-based
compensation. The company had three chief executives during these
years: David H. Komansky, who left in 2002, was followed by E. Stanley
O'Neal. Mr. O'Neal was ousted in 2008 and replaced by John A. Thain,
who was dismissed last month.

Mr. O'Neal's total pay for the six years he ran Merrill totaled $157.7 million. He declined to comment.

To be sure, executive compensation at the companies in the
Equilar study was almost always a blend of stock and cash, and the
downturn has hammered the wealth of executives who kept their shares.
But analysts say that even if stock awards were removed from the mix,
executives still received windfalls.

"This is really in our view a giant fraudulent conveyance,
where money was paid out to executives at firms that were fatally
undercapitalized," said Daniel Pedrotty, director of the A.F.L.-C.I.O.
office of investment. "We are arguing for a recovery of money that was
used by people who treated these companies as a giant A.T.M. machine."

John D. Finnegan, the chief executive of the Chubb Corporation,
has been the head of Merrill's compensation committee since 2007. Last
March, when renewed outrage over pay packages for bankers emerged, he
appeared before Congress. Lawmakers had questions about the $161
million that Merrill gave to Mr. O'Neal when he left the firm.

The essence of Mr. Finnegan's testimony was that Mr. O'Neal
earned the money. "Over 80 percent of the amount consists of company
stock he received as part of his annual bonuses for 2006 and prior
years," Mr. Finnegan said. "Those bonuses were paid because of the
company's and Mr. O'Neal's strong performance during those earlier
periods."

Now that performance has turned to dust. Mr. Finnegan declined to comment.

Many investors say the whole pay-for-performance model is a
mirage because consultants are too willing to make clients happy by
making sure they are handsomely compensated — often regardless of
performance.

John England, head of the financial services compensation
practice at Towers Perrin, was the consultant on Merrill's pay
practices. He or his firm also devised pay packages for Angelo R.
Mozilo, the former chief of Countrywide, and for Kerry K. Killinger,
the former chief at Washington Mutual.

Mr. England declined to be interviewed. A spokesman for Towers
Perrin said that it did not comment on specific clients but that the
firm was confident about its practices and that its expertise had
"resulted in the delivery of valuable, sound and objective executive
compensation advice."

Yet Mr. England's white-collar clients also oversaw one of the greatest demolitions of financial value in history.

Countrywide generated losses of $3.9 billion in 2007 and early
2008, before it was absorbed by Bank of America last July. Those losses
erased the company's entire earnings in 2006 and half of its profit for
the previous year. But Mr. Mozilo received $82.4 million in performance
pay between 2005 and 2008, roughly half in cash, according to Equilar.

Mr. Mozilo could not be reached for comment.

Washington Mutual, overseen by Mr. Killinger until federal
authorities forced its sale last year to JPMorgan Chase, is another
case. Its...

more:  http://www.michaelmoore.com/words/latestnews/index.php?id=13469