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New York Times, February 22, 2009 column


The New York Times




February 22, 2009

Fair Game

After Huge Losses, a Move to Reclaim Executives’ Pay

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

Photo illustration by The New York Times



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 Energy and Commerce Committee, 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 mortgage-related losses of $8 billion in 2007 and 2008 wipe out all of its earnings in 2006 and 2005 and three months’ worth of profits generated in 2004.

Mr. Killinger received $38.2 million in performance pay between 2005 and 2008, Equilar said; of that amount, just $7.6 million was paid in cash, the rest in stock. A spokesman for Mr. Killinger said he would not comment.

Bear Stearns, which collapsed last March under the weight of soured mortgage holdings before it could record major losses, awarded its chief, James E. Cayne, $58.5 million in performance pay from 2005 through 2007. Some $30 million of that was cash, and the rest was stock. Mr. Cayne could not be reached for comment.

EVEN as shareholder ire over burgeoning pay packages has risen, recoveries of compensation are rare.

“I think you can count on two hands the number of voluntary or involuntary returns of compensation by executives,” said Paul Hodgson, senior research associate at the Corporate Library, a corporate governance research firm. “More companies are introducing clawback provisions, but instituting the provisions and actually clawing back the pay are two different things.”

In the past, clawbacks were typically considered only in cases of fraud or accounting irregularities. Now shareholders want clawbacks if compensation ultimately encouraged dangerously risky behavior and was based on profits that later evaporated.

The initiative is directed almost exclusively at companies’ most senior management, not at lower-level employees who earned relatively modest sums.

Neil M. Barofsky, the special inspector general for one of the federal bailout efforts, the Troubled Asset Relief Program, is examining compensation given to top managers at banks that received money under the program. And as the annual shareholder meeting season approaches, executive pay is expected to be an even more contentious issue, analysts say.

“Poorly structured pay packages encouraged the get-rich-quick mentality and overly risky behavior that helped bring financial markets to their knees and wiped out profits at so many companies,” said Amy Borrus, deputy director at the Council of Institutional Investors. “And yet many of these C.E.O.’s have pocketed enormous compensation.” Brian Foley, an independent compensation consultant in White Plains, said clawbacks shouldn’t be the only goal of irate shareholders. He said boards should also recover performance-based contributions to executives’ pensions, because those payments were also tied to profits that may have proved fleeting.

“If these guys accumulated money during years when the earnings actually was not earned,” he asked, “why shouldn’t the pensions be clawed back as well?”



A version of this article appeared in print on February 22, 2009, on page BU1 of the New York edition.



Copyright 2009 The New York Times Company




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