Stephen Schwarzman, CEO and founder of The Blackstone Group L.P., saw his fixed pay double between 2007 and 2008. Prior to June 2007, the date of the company’s IPO, Mr. Schwarzman did not receive any salary so there was only six months of it to record. That doubled in 2008 to 12 months. Now for most of us that would be a significant increase in compensation. But such a change in base pay level is dwarfed by Mr Schwarzman’s increase in total realized compensation, which went from $354,482 in 2007 to $702,440,573 in 2008. And no, I haven’t misplaced any commas, or hit any typos, or put an extra zero in there. That really does say that Mr. Schwarzman earned over $700 million last year, largely from the vesting of Blackstone Holdings Partnership Units.
That’s an increase of more than 200 thousand percent. This increase is cunningly disguised in Blackstone’s 2009 proxy filing as a decrease of 99.81 percent. Talking of big figures, a pretty large one can also be found in the latest Summary Compensation Table. Some $1.4 billion (and no, that’s not a typo either, it’s billion not million) is expensed as a Stock Award for Mr. Schwarzman. In other words, as the proxy filing has it, this amount is “the expense recognized for financial statement reporting purposes” of the vesting of a stock award. In other words, this amount had to go under expenses on the balance statement. That’s a lot of expense. For one guy? It didn’t necessarily contribute to the 48 percent decline in the company’s stock over the last four quarters, but it can’t have helped the company’s income. Indeed it contributed very significantly to a negative income – better known as a “loss” – of $5.6 billion. Revenues were negative in the first place, but the expenses just whacked them.
Some might say that having Mr. Schwarzman as the chairman of the compensation committee (this is true too, honestly) might have something to do with this, but in reality, the $700 million – and there’s more coming next year – is actually Blackstone redistributing to Mr. Schwarzman the interests that he contributed to Blackstone prior to the IPO. Mr. Schwarzman only really gets paid for realized investments in what the company calls “carried interest” from its “carry plans”. These amounts are directly tied to the performance of the firm’s investment funds. And, in a move that mimics closely some of the ideas being bandied around Washington at the moment to improve banking compensation, for most officers these “carried interest” payments are 25 percent deferred until the investment income is realized, and 75 percent deferred for three years after that. AND, even more importantly, they are subject to clawback arrangements that not only could clawback any and all compensation paid, but an additional 50 percent out of the executive’s own pocket if the loss exceeds the investment. Now, if I were asked, that’s the spin I’d have put on the $700 million. Paul Hodgson — Senior Research Associate
The company accomplishes this sleight of hand by producing a table that ignores the $700 million of partnership units and includes two enormous cash amounts ($137,765,197 and $42,158,624) for 2007 that represent participation payments paid on “ownership interests” and are classified as a form of cash incentive but are not included in the Summary Compensation Table perhaps because they occurred prior to the firm’s IPO. No such participation payments were made in 2008, therefore Mr. Schwarzman’s “total cash compensation” went from $180,098,821 in 2007 to $350,000 in 2008. Putting a positive spin on pay of $700 million has got to be tough, and whichever committee came up with this one deserves to be congratulated for chutzpah alone.
