The Corporate Library Blog

European Bankers’ Pay Curbs

I love the way European’s just get on with it.

No stupid lobbyists to get in the way, no heartrending, shirt-rending, sackcloth-wearing, what’ll-we-do-if-all-the-banks-move-to-Buenos-Aires nonsense.

No, just a straightforward decision.

Bankers in the 27-nation European bloc will be barred from taking home more than 30 percent of their bonus in cash starting next year, and may lose some of the rest if the bank’s performance takes a downturn during the next three years. More than that – and just so there are no idiotic salary-stock decisions – those banks not cutting back on their highest earners’ salaries are now mandated to set aside more capital to make up for the risk. 

At least 70 percent of a bonus must be deferred for up to three years and paid in a special kind of security, called contingent capital, that would decline in value if the bank’s financial performance deteriorates, potentially declining to nothing. If bonuses exceed a certain amount, cash could constitute only 20 percent of the payout. 

This passed by a vote of 625-28. So any filibustering would have gone unheeded. All it needs now is for national finance ministers to endorse it, and it will take effect January 1. 

Those national finance ministers will also decide whether the pay curbs apply only to a bank’s top executives, or also to traders who take big risks and can make even more money in any one year as top executives. 

And what’s been done here in the US?

“Would you mind having a vote on pay to mollify the shareholders, but only every three years, I mean, is that OK, or would you like us to make it 10? We wouldn’t want to inconvenience.”

It’s the cringing that gets to me.

“Oh, and take a big salary rise, too. CEOs are only there for an average of three years. Everyone will have forgotten when the next vote comes round and the CEO will have retired by then….”

Paul Hodgson - Senior Research Associate

Delay Some Pay

An article by Robert Shiller, a Yale professor, appeared in the June 20 edition of the New York Times called “Help Prevent a Sequel. Delay Some Pay”. It describes the Squam Lake Group, a band of 15 professors of financial economics who get together and pool their resources to solve the problems of the day. The article goes on to describe a solution for the whole banking executive compensation problem.

But let’s backtrack a little. The article makes a number of claims and assertions, so let’s look at these.

Claim 1: “But it’s not the high level of executive salaries that helped cause the financial collapse.”

Well, OK, not salaries themselves, which in finance were pretty low, at least on the Street. At least they were until poorly written compensation restrictions managed to boost them out of the water. But no one’s claiming that it is salaries that caused the problem. It was pay. High pay. All of it. Bonuses, stock, stock options. Not just salaries. Why would you be tempted to cause the downfall of the financial system for $600,000 a year? No one would. But for $60 million a year, now we’re talking.

Claim 2: the 1993, Section 162(m) $1,000,000 pay cap directly contributed to the crisis because in seeking to limit compensation it encouraged it to balloon in the form of stock options.

Well, actually most of the compensation delivered to Wall Street executives came in the form of stock and cash, rather than options, but the theory is the same. And yes, it was a stupid law, and had as many unintended consequences as most government interventions in pay, but I don’t think it deserves all the blame. Didn’t the whole idea for stock options come from academia in the first place?

Solution: “the Squam Lake group recommends that companies be encouraged to withhold a good part of the compensation of their top executives for a number of years, and that it should not take the form of stock options.”

Fair enough.

But most, if not all, of the banks are already doing that.

In fact, most, if not all, of the banks were doing it all along. Just read the proxy statements. It’s all there.

All banking executives took a major hit in the collapse of stock prices. Some of them mortal blows in the case of Lehman and Bear Stearns. Literally billions of dollars of restricted stock lost.

But they didn’t care.

Why? Because they’d already made so much money out of the banks anyway that a few hundred million more didn’t make any difference. So it was the level of pay. And deferring it, unless you defer it all, isn’t going to mean squat. Particularly if you don’t tie it to future performance conditions.

Paul Hodgson - Senior Research Associate

On why salary stock is semantic quibbling

OK. This is really beginning to get on my nerves.

This stupid salary stock thing.

OK. I looked it up special this afternoon. It is permissible for TARP recipients to deliver portions of salary in stock under EESA Section 111, and, since the definitions are the same, under ARRA too.

And it doesn’t actually say anywhere in these compensation restrictions that you CAN’T increase base salary.

But just because it doesn’t say you can’t increase base salary, doesn’t mean to say you have to increase base salary.

I mean, have these people ever heard of a pay cut? They deliver the biggest loss of value to their shareholders in decades and STILL they don’t believe they deserve a pay cut? And I don’t mean just a reduction. I mean a pay cut.

So, when the pay regs came out, we all thought it meant a pay cap, effectively. No bonuses except stock ones, and capped at a third of total annual compensation.

Immediate reaction?

Thousands of lawyers poring over the Act to see if there is any prohibition – among the many prohibitions – against increasing annual compensation.

I mean, if 1/3x + y = x, with x being total annual compensation (yeah, I know, my son’s doing Algebra I and it’s bringing it all back to me) then the only way to make x bigger (and we couldn’t, after all, have x stay the same or get smaller or anything ridiculous like that) is by making y bigger. So that’s what they all did. Salary $800,000? Forget that, make it $5,000,000, now you’re talking.

Now, I’m not saying all the banks did it, but, boy oh boy, a heck of a lot of them did.

But, you know, if stock is supposed to be capped at 1/3 of annual compensation, then that should be it. Pretending it is salary and vesting it immediately so it is not “at risk of forfeiture” is just semantic quibbling. It’s unworthy of our banks and our bankers and our bankers’ compensation committees and  their boards and their professional advisors.

Salary stock is rubbish, poppycock, balderdash, blather, tosh, piffle, fiddle-faddle, hokum, bilge. It’s tommyrot, moonshiner, flimflam, guff, hooey, gibberish, flannel, rodomondatade, and, my personal favorite, havers.

Somebody should have stopped them. Somebody should have written the definitions properly. And somebody should have prohibited increasing base salaries in the teeth of the worst financial crisis this country has seen for many a long year.

It just looks bad, if nothing else.

Paul Hodgson - Senior Research Associate

Financial Stability Board Scorecard on Bank Compensation

A peer review of the the G20 companies’ implementation of sound compensation practices has been issued by the Financial Stability Board (FSB).

The scores so far are:

Australia, France, Germany, Italy, The Netherlands, Saudi Arabia, Switzerland, and the U.K. – A, well done boys and girls.

Canada and Spain – B+, again, well done, excellent choices made.

China, Hong Kong, Korea, Japan, and the U.S. – B, it’s a start, but could work harder next semester.

Brazil, Mexico, Singapore, Argentina, South Africa, and Turkey – C, could do better. More attention to detail needed.

India, Indonesia, and Russia – D, insufficient effort is leading to work being handed in late on a consistent basis.

It runs the gamut from enforceable regulations – the A graders – to “still thinking about it” – the D graders. And the U.S. is judged to be “following a primarily supervisory approach to implementation”.

Pretty soon, someone somewhere is going to claim that there is going to be a banker brain drain to India, Indonesia, and Russia unless we repeal all this supervision….

Paul Hodgson - Senior Research Associate

Values -- from Doonesbury

Banks ASKING Government to Help Them Curb Pay and Bonuses: Now THAT'S News

The news that Reuters Breakingviews lays on us this morning – that two chairmen of global banks have asked two governments – the U.S. and the U.K. ones – to help them rein in bank pay is quite astounding.

The last time I remember anything like this happening, the chairman of the U.K. coal industry asked Margaret Thatcher to help him break the coal union’s power because of their demands for higher pay. I mean, why should you pay anyone decent wages to work down a coal mine? She responded with the most vindictive campaign of slurs and legislation I’ve ever experienced. Utterly in character for Mrs. Thatcher, of course. And after months of flying pickets, riots, fighting, marches, the unions eventually caved. And we don’t really have a coal industry in the U.K. anymore….

I’m trying to picture rioting bankers, in Gucci suits and without the overalls and the coal-stained faces, obviously, but I’m having difficulty. Besides, why riot when you can threaten to work for the competition?

But there’s the rub. The reason the chairmen have gone to their respective governments – and one is a U.K.-based bank and the other is a U.S.-based bank, both speaking on the condition of anonymity but if I were to hazard a guess I would think that at least one of them begins with a B – is that they fear acting unilaterally due to dread of a mass talent exodus.

Now,  we are not generally in favor of government intervention in compensation matters due to the fact that they generally mess it up big time. But if this is the only way it can happen, and if the banks are asking for it, let it happen. But please, please, please, just ask our advice beforehand.

In fact, forget asking for it, here it is.

Our views on long-term compensation are already well-known, so major structural changes are absolutely necessary for 99 percent of banks. But here’s a possible solution to the high pay problem. Figure out how much money the banks would have been making if their respective governments had NOT bailed them out, and pay bonuses based on that.

Paul Hodgson - Senior Research Associate

Whack a Banker

A friend back home in England just told me a great story about an amusement park in Suffolk in Southern England that has introduced a new game called Whack a Banker. It’s based on the old game Whack a Mole, and basically punters pay 40p (about 65c) so they can bash as many bankers on the head as possible in 30 seconds. It’s proving so popular the owner says he has to keep replacing worn out mallets.

He also said: “The bankers are all bald and all look the same because that’s how I think people see bankers – as faceless.”

You couldn’t make this up.

Check out the video.

And even if you win, the banker comes on and thanks you for generously funding his retirement.

Paul Hodgson - Senior Research Associate

My Op-Ed for CNN.com on Wall Street Bonuses, etc.

CNN.com published my op-ed on the the Wall Street pay problem:

These purported bastions of capitalism protected themselves from risk by limiting their downside exposure while taking their pay off the top. Second, rinse and repeat -- they took bailout money and kept paying themselves as though they earned it.

And on what we should do about it:

There is simply no excuse for handing out stock or options without a discount to offset the subsidies from the bailout and an indexed formula so they pay out only when the company outperforms its peer group. Executives should be paid for their performance, not the market's performance.

And on who is responsible:

the key is the boards of directors of these companies. It is unfathomable to me that many of the very same directors who approved the outrageous pay packages that led to the financial crisis continue to serve on boards. Until we remove the impediments to shareholder oversight of the board, we cannot hope for an efficient, market-based system of executive compensation.

Also: my testimony before the House Financial Services Committee was quoted in Time Magazine, Courthouse News Service, and The Nation. 

Nell Minow - Editor

Bank pay: It’s not my fault, guv, it’s TARP

Doing some digging for some bank dirt for Nell Minow’s written evidence before the House Financial Services Committee, I resuscitated Wells Fargo’s infamous 522 percent “salary adjustment” which I had written about earlier, only to find that the flipping bank had set a trend. Not only that, but Christmas presents, and Epiphany gifts were being handed out right, left, and center by banks – thanks to our own Hoang Nguyen and Vineeta Anand of AFL-CIO for sending me the links.

First the trend, thanks to Fifth Third Bancorp slavishly following Wells Fargo’s example. And the bank even has the gall to try and attribute this to the government, as if somehow TARP FORCED them to increase their CEO’s salary by 250 percent. It even says it “amended the compensation of its senior executive officers in order to comply with the Interim Final Rule on TARP Standards for Compensation and Corporate Governance.” How’s that for barefaced cheek? Not only Kevin Kabat, the CEO, received a base salary increase of statuesque proportions on September 24, 2009, so did three other executives – Robert Sullivan, Daniel Poston, and Greg Carmichael, with increases ranging from 100 to 160 percent. Some were for additional job responsibilities, but others were merely “compensation adjustments related to compliance with the TARP standards for compensation.” Talk about unintended consequences. Then on December 15, 2009, an early Christmas present came for Mr. Poston and Mr. Carmichael in the form of further salary increases. Mr. Poston’s salary has now more than tripled from just over $300,000 to $950,000, and Mr. Carmichael’s has almost tripled from around $570,000 to over $1.6 million. And I don’t care that it’s paid partly in stock.

Other seasonal gifts came in the form of simple stock at other banks. For example, on December 23, 2009, executives at PNC Financial Services received the following amounts:  James E. Rohr ($4,874,000); Richard J. Johnson ($1,257,000); Joseph C. Guyaux ($2,084,000); William S. Demchak ($4,093,000); and Timothy G. Shack ($1,391,000) in restricted stock. Of course, on that date the stock was worth $53.55, compared to a high of $81.21 in September 2008. If it went back up there, CEO James Rohr’s award, for example, would be worth almost $7.4 million. A $2.5 million increase just for giving back to shareholders what he’d lost for them in the first place. Happy Christmas.

The next day, on Christmas Eve, Wells Fargo started making free with the stock grants again. At first sight these awards were “performance-restricted” so not so free as those at PNC, where two years service was all that was required for the grants to vest. But if you look a little closer at the conditions of vesting, half of CEO John Stumpf’s $10.3 million award will vest in three years even if the bank performs at the lower quartile position in the KBW Bank Sector as measured by return on realized common equity. And if the stock price returns to former levels that half would be worth over $7 million. For UNDERPERFORMING three-quarters of its peers? If shareholders are understandably reluctant to invest in companies which perform worse than their peers, why should executives be rewarded with incentives for running them?

Moving into Epiphany and beyond, what’s good enough for Wells Fargo is good enough for Morgan Stanley. For example, some of the 97,295 performance stock units awarded to CEO James Gorman on January 21, 2010 will vest even if the company ranks 8th out of its 10-strong peer group. So much for performance. The other performance target that must be met is average three-year return on equity (ROE) of 12 percent. Given that the company’s five-year average ROE to date is 14.2 percent, and that includes two of its worst years ever, probably, this doesn’t look too challenging either. In addition, at the same time as the performance stock units, Mr. Gorman received twice as many time-restricted stock units (194,950) that will vest if he just sticks around. So much for performance.

Just the other day someone asked me as I sat on a panel speaking about executive compensation whether I thought any good compensation practices had emerged as a result of the financial crisis.

I gave a very short answer.

“No.”

Paul Hodgson - Senior Research Associate

More on banks and bonuses and bailouts

With banks’ earnings season upon us, the dichotomy of experience comes sharply into focus. Goldman makes huge profits, slashes the percentage of revenues it devotes to compensation, has a NEGATIVE compensation expense in its fourth quarter, but still manages to pay out $16.19 billion. Morgan Stanley has a horrible year, its first loss in 74 years, but still manages to pay out $14.4 billion in compensation, some 62 percent of revenue, compared to Goldman’s 35.8 percent.

Now, this is all interrelated. Low revenues and an insufficient reduction in compensation will lead to a higher percentage of revenues being paid out. High revenues will lead to a lower percentage being paid out, unless compensation rises in line with the revenues, and it doesn’t when the whole world is breathing down your neck.

But, wait a minute, why are we talking about revenues here anyway? Whatever happened to earnings? That’s the actual profit piece, yes? Morgan Stanley’s percentage of earnings being paid out as compensation would look a whole lot worse than 62 percent. Of course, you have to pay people’s base salaries, but, really, there must be plenty bonuses in there too, and shareholders will be asking what for?

Right now, on Friday morning, we’ve had Wells Fargo’s record net income, improved net income at Bank of America, where personnel costs rose because of the ”acquisition of Merrill Lynch”, record revenue for JPMorgan. And while JPMorgan’s compensation expense was down in investment banking due to lower performance-related pay, it was up in commercial banking, treasury and asset management due to HIGHER performance-related pay.

But we have to ask ourselves how they accounted for taxpayer bailout money and its effects in their financials? There’s all sorts of exceptional items, write-offs, debt refinancing, but where is the real adjustment for the government having quite simply saved them from collapse. Because in collapse there would be no compensation expense. Well, except for the CEO….

Paul Hodgson - Senior Research Associate