The WSJ, according to people familiar with the matter, today says that the Pay Czar, Kenneth Feinberg, is considering cutting base salaries for those companies whose pay he is overseeing – AIG, Bank of America, Citigroup, GM, GMAC, Chrysler and Chrysler Financial (find the governance risk profiles of these companies in our online store).
Except it’s not really cutting salaries, it’s paying them in stock. Restricted stock. Not performance-restricted stock, just time-restricted by the sound of it, with not a performance target in sight.
That’s certainly what was “approved” for Robert Benmosche at AIG. A subject we have already blogged about. A $7 million salary, $3 million in cash and $4 million in stock.
If this is what is meant by cutting salary, please, Ken, please, cut MY salary.
The WSJ article also indicates that people familiar with the matter say the Pay Czar is not interested in placing hard dollar caps on pay. This is fair enough, as companies will just find a way round that anyway, they already have, but I might humbly suggest a special form of cap.
If all this salary is to be paid out in stock, with that stock either worthless or nearly so in many cases, the upside potential is huge. A solid incentive, you might say. But take Citigroup for an example. The stock is currently trading at around $4.70. To get to $4 million in stock, that would take just over 851,000 shares. Now just suppose, for the sake of argument, “and wouldn’t it be nice” Citi shareholders are thinking, that Citi’s shares go back up to the 5-year high of around $55. That $4 million turns into about $47 million.
Vikram Pandit deserves it if he can get it back up there, I hear the cry. But then if you bought Citi shares at $55, you’re just back where you started, plus a lot of heartburn.
To me, that $47 million sounds like a windfall.
However, there is one, readily available, tried and tested way of avoiding windfalls. The premium-priced stock option. Now I’m not suggesting that the Pay Czar recommend issuing 851,000 stock options with an exercise price of $55 to Vikram Pandit. But $20? That I like the sound of.
Paul Hodgson — Senior Research Associate
