Banks Prepare for Big Bonuses, Public Wrath (NYT)

by Dollars and Sense

From the New York Times:

Banks Prepare for Big Bonuses, and Public Wrath

By LOUISE STORY and ERIC DASH
Published: January 9, 2010

Everyone on Wall Street is fixated on The Number.

The bank bonus season, that annual rite of big money and bigger egos, begins in earnest this week, and it looks as if it will be one of the largest and most controversial blowouts the industry has ever seen.

Bank executives are grappling with a question that exasperates, even infuriates, many recession-weary Americans: Just how big should their paydays be? Despite calls for restraint from Washington and a chafed public, resurgent banks are preparing to pay out bonuses that rival those of the boom years. The haul, in cash and stock, will run into many billions of dollars.

Industry executives acknowledge that the numbers being tossed around—six-, seven- and even eight-figure sums for some chief executives and top producers—will probably stun the many Americans still hurting from the financial collapse and ensuing Great Recession.

Goldman Sachs is expected to pay its employees an average of about $595,000 apiece for 2009, one of the most profitable years in its 141-year history. Workers in the investment bank of JPMorgan Chase stand to collect about $463,000 on average.

Many executives are bracing for more scrutiny of pay from Washington, as well as from officials like Andrew M. Cuomo, the attorney general of New York, who last year demanded that banks disclose details about their bonus payments. Some bankers worry that the United States, like Britain, might create an extra tax on bank bonuses, and Representative Dennis J. Kucinich, Democrat of Ohio, is proposing legislation to do so.

Those worries aside, few banks are taking immediate steps to reduce bonuses substantially. Instead, Wall Street is confronting a dilemma of riches: How to wrap its eye-popping paychecks in a mantle of moderation. Because of the potential blowback, some major banks are adjusting their pay practices, paring or even eliminating some cash bonuses in favor of stock awards and reducing the portion of their revenue earmarked for pay.

Some bank executives contend that financial institutions are beginning to recognize that they must recalibrate pay for a post-bailout world.

"The debate has shifted in the last nine months or so from just 'less cash, more stock' to 'what's the overall number?' " said Robert P. Kelly, the chairman and chief executive of the Bank of New York Mellon. Like many other bank chiefs, Mr. Kelly favors rewarding employees with more long-term stock and less cash to tether their fortunes to the success of their companies.

Though Wall Street bankers and traders earn six-figure base salaries, they generally receive most of their pay as a bonus based on the previous year's performance. While average bonuses are expected to hover around half a million dollars, they will not be evenly distributed. Senior banking executives and top Wall Street producers expect to reap millions. Last year, the big winners were bond and currency traders, as well as investment bankers specializing in health care.

Even some industry veterans warn that such paydays could further tarnish the financial industry's sullied reputation. John S. Reed, a founder of Citigroup, said Wall Street would not fully regain the public's trust until banks scaled back bonuses for good—something that, to many, seems a distant prospect.

"There is nothing I've seen that gives me the slightest feeling that these people have learned anything from the crisis," Mr. Reed said. "They just don't get it. They are off in a different world."

The power that the federal government once had over banker pay has waned in recent months as most big banks have started repaying the billions of dollars in federal aid that propped them up during the crisis. All have benefited from an array of federal programs and low interest rate policies that enabled the industry to roar back in profitability in 2009.

This year, compensation will again eat up much of Wall Street's revenue. During the first nine months of 2009, five of the largest banks that received federal aid—Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley—together set aside about $90 billion for compensation. That figure includes salaries, benefits and bonuses, but at several companies, bonuses make up more than half of compensation.

Read the rest of the article.

Labels: Bank of America, ceo pay, compensation, Goldman Sachs, Wall Street bonuses

 

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1/10/2010 02:56:00 PM 0 comments

 

Pay Czar's Ruling on Compensation

by Dollars and Sense

The Wall Street Journal, and (scroll down) Naked Capitalism, on compensation czar Kenneth Feinberg's ruling on executive pay at seven bailed-out financial firms:

Pay Czar to Slash Compensation at Seven Firms
By DEBORAH SOLOMON and DAN FITZPATRICK | Tuesday, October 22 2009

The U.S. pay czar will cut in half the average compensation for 175 employees at firms receiving large sums of government aid, with the vast majority of salaries coming in under $500,000, according to people familiar with the government's plans.

As expected, the biggest cut will be to salaries, which will drop by 90% on average. Kenneth Feinberg, the Treasury Department's special master for compensation, is expected to issue his determinations today.

Mr. Feinberg's ruling will provide fodder for the long-running debate about whether the Obama administration is being [sic— something missing here? "tough enough"? "too tough"?] on Wall Street. An executive at one of the seven companies under Mr. Feinberg's authority said the terms came as a shock, especially because they changed so suddenly. The compensation restrictions "were clearly much worse than what had been anticipated."

The largest single compensation package will be less than $10 million and is destined for a Bank of America Corp. employee, according to people familiar with the matter. That is much less than Wall Street's standard payouts for star employees.

Yet some executives will still walk away with large paychecks. And some big salary cuts might skew overall numbers. Outgoing Bank of America Chief Executive Ken Lewis will receive no salary for 2009. Already, Citigroup Inc. is telling employees the net impact of Mr. Feinberg's rulings will be minimal because the cut salary will be shifted from cash to longer-term stock grants, said people familiar with the matter.

The Obama administration gave Mr. Feinberg the job of more closely tying compensation to long-term performance, something the White House believes will help prevent employees from taking unnecessary risks for short-term gains. The administration believes skewed compensation incentives were one cause of the financial crisis.

In addition to setting dollar amounts for the top 175 employees at the seven companies, Mr. Feinberg is also charged with setting compensation structures for an additional 525 people at the firms.

Some of the toughest pay restrictions will come at the financial-products unit of American International Group Inc., which has been blamed for the firm's near-collapse. No employee within that unit will receive compensation of more than $200,000, people familiar with the matter said.

The companies under Mr. Feinberg's authority are AIG, Bank of America, Citigroup, General Motors Co., GMAC Inc., Chrysler Group LLC and Chrysler Financial.

Read the rest of the article.
Yves Smith of Naked Capitalism is skeptical:

Pay Czar Decides to Collect a Few Scalps, a Sign of Weakness

The Wall Street Journal reports that the pay czar, Kenneth Feinberg, is going to cut executive comp at 7 TARP recipients for the 25 most highly paid employees.

Does this really mean anything? The press will noise it up as significant (and some outlets will no doubt finger wag at this "interference") but the short answer is no.

First, recall Feinberg's hollow mandate. He is limited to only TARP recipients, not the beneficiaries of other forms of government largesse. And as anyone who has an operating brain cell knows, the number of firms on the dole and the degree of subsidies is much greater than the TARP. Have a look at the Fed's balance sheet for a reality check. Even Larry Summers said,

There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.

So let us look at the list of companies affected. AIG, Bank of America, Citigroup, General Motors Co., GMAC Inc., Chrysler Group LLC and Chrysler Financial. AIG is effectively nationalized but is allowed to operate as a private company, a simply bizarre state of affairs. Pay cuts falls well short of the oversight the government should be exercising (any private owner with that big of a stake would have thrown out the board and installed new management, for starters, and be all over AIG like a cheap suit). So this is an overdue, token measure to appease the public over the AIG retention bonuses that were also extended to clearly non-essential support staff, which is a clear tipoff that they were also extended to non-essential management.

Four of the companies are auto bailout related, so we can exclude them as far as implications for big financial firms are concerned.

Citigroup is an obvious ward of the state too, and he AIG argument applies there. The government should have more control there too, which does NOT mean micromanagement. When the Swedish nationalized their banks, they replaced management and set strict goals and targets, but did not interfere in operations. Bank of America may look like a borderline case, but it would be dead now had it not gotten emergency infusions. Given its credit card losses, Merrill, and Countrywide (for starters) combined with the sudden exit of Ken Lewis, it may well be in worse shape than is now perceived.

The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the "heads I win, tails you lose" game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.

If the government is going to backstop the industry (and this isn't an "if" anymore), it needs to limit those firm's activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don't like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments.

Read the original post.

Labels: ceo pay, compensation, Kenneth Feinberg, Naked Capitalism, Wall Street, Wall Street bonuses

 

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10/22/2009 12:11:00 PM 0 comments

 

CEOs of the World ... UNITE!

by Dollars and Sense

A little ideological confusion at the Wall Street Journal's front page article on Ken Lewis having to forgo $2.5 million in compensation. [Don't cry for him, unemployed America: he'll somehow manage to get by on his $69.3 million payout when he retires in a few months).

According to the Journal:

The move angered many on Wall Street, which has been anxiously awaiting Mr. Feinberg's rulings on compensation at the seven federal wards, which also include Citigroup Inc. and General Motors Co. Mr. Feinberg had been expected to clamp down on compensation by cutting highly paid employees' salaries. But until now, there has been little indication he would take away an employee's entire pay.

Since when is a CEO an employee?

--d.f.

Labels: Bank of America, ceo pay, Daniel Fireside, Golden Parachutes, Ken Lewis

 

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10/16/2009 01:39:00 PM 0 comments

 

Lose Money Get Raise

by Dollars and Sense

The New York Times has a nice chart showing how CEOs from public companies are making out like bandits with massive pay raises even while their bottom lines plummet.

Some tidbits: ArcherDanielsMidland CEO Patricia A. Woertz saw her compensation jump 397% to $15 million from 2007 to 2008 while profits fell 17%.

Data giant EMC's CEO Joseph M. Tucci a 148% raise in 2008 to $11.7 million while the company lost money.

On a similar note, Paul Krugman laments that compensation for investment bankers is zooming back up to levels from pre-meltdown days. As he notes:

there's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.

...

One can argue that it's necessary to rescue Wall Street to protect the economy as a whole - and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it's dangerous. Why, after all, did bankers take such huge risks? Because success - or even the temporary appearance of success - offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we're seeing similar rewards offered to people who can play their risky games with federal backing.

So what's going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren't plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They're making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it's eat, drink and be merry, for tomorrow you may be regulated.

--d.f.

Labels: ceo pay, compensation, Corporate Swindles, Daniel Fireside, executive pay, Paul Krugman

 

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4/27/2009 03:53:00 PM 0 comments

 

WSJ and Hightower on Wall Street Compensation

by Dollars and Sense

The bonuses and compensation at Merrill Lynch are front-page news in today's Wall Street Journal; here's the teaser from their site:

Merrill's $10 Million Men

Top 10 Earners Made $209 Million in 2008 as Firm Foundered

As bad as 2008 was for Merrill Lynch & Co., it was very good for Andrea Orcel, the firm's top investment banker. Although Merrill's net loss ballooned to $27.6 billion last year, Mr. Orcel, 45 years old, was paid $33.8 million in cash and stock, just shy of his pay in 2007.

While Merrill staggered, 11 top executives were paid more than $10 million in cash and stock last year, say people familiar with the situation. An additional 149 received $3 million or more.

Here's the link, but it's a subscriber-only article.

Meanwhile, here's a piece by Jim Hightower on Wall Street compensation from his website:

EX-WALL STREET CEO'S STILL GETTING PERKS

By Jim Hightower | Tuesday, March 3, 2009

Once upon a time, not so long ago, Citigroup was a fairytale financial conglomerate that was the richest corporation in all the land.

But it turns out that Citigroup's magic kingdom was, like most Wall Street firms, built on fairy dust, and—poof!—the kingdom has vanished. Last year, the once mighty bank lost $18.7 billion dollars, fired 39,000 employees, and was reduced from a golden chariot to a pumpkin. It only survives today because of a $52 billion bailout from taxpayers.

And where are the executive alchemists who created the fairy dust to make Citigroup seem like so much more than it was? These royal princes of the kingdom, who were paid millions for their magical creations, all retired in riches, but you still might find some of them at the bank.

Take Charles Prince, who was CEO of Citigroup until retiring a year and a half ago—just as the fairy dust went poof. Prince Prince, who'd been paid $67 million for his first three years of overseeing the kingdom, was graced with a $10 million bonus in his last year, even though the empire was collapsing around him. But Prince wasn't sent away. He continues to enjoy a well-appointed office at the bank, an executive assistant, a limo, and a chauffeur.

Even though Citigroup is now on a financial death watch, several other of its former executives continue to draw millions of dollars in personal perks. Sandy Weill, for example, not only has kept an office, staff, and his limo since retiring three years ago, but he's also paid a consulting fee of $3,800 a day.

You'd hope that at least one of these guys would have the integrity to say, "You know, this is a ripoff, and I don't deserve it." Rather than wait for that magical moment, however, Congress should step up now and pull the plug on these pampered princes of greed.

"Bank executives might leave, but perks often linger," www.statesman.com, February 22, 2009.

Labels: Andrea Orcel, ceo pay, Charles Prince, Citigroup, Jim Hightower, Merrill Lynch, Sandy Weill, Wall Street, Wall Street bonuses

 

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3/04/2009 12:47:00 PM 0 comments

 

CEOs of America Unite!

by Dollars and Sense

Kiwitobes has put together an interesting visual representation of overlapping membership on corporate boards among the largest U.S. corporations. This helps provide one explanation for the astronomical sums paid to CEOs and their lackeys (we get to talk like this on May Day). But as economist Arthur MacEwan explained in our magazine a few years back, the gap in pay between those who own the corporations and those who do the work is much greater in the United States than it is in many other countries that similarly have interlocking corporate boards. The rest of the answer, he concludes, has to do with the relative lack of power of U.S. workers.

Over many decades, U.S. companies have created a highly unequal corporate structure that relies heavily on management control while limiting workers' authority. Large numbers of bureaucrats work to maintain the U.S. system. While in the United States about 13% of nonfarm employees are managers and administrators, that figure is about 4% in Japan and Germany. So U.S. companies rely on lots of well-paid managers to keep poorly paid workers in line, and the huge salaries of the top executives are simply the tip of an iceberg.

This highly unequal corporate system is buttressed by an unequal political and social structure. Without a powerful union movement, for example, there is little pressure on Washington to adopt a tax code that limits corporate-generated inequality. Several other high-income countries have a wealth tax, but not the United States. In addition, U.S. laws governing the operation of unions and their role in corporate decision making are relatively weak (and often poorly enforced). Without powerful workers' organizations, direct challenges to high CEO pay levels are very limited (as is the power to raise workers' wages). So income distribution in the United States is among the most unequal within the industrialized world, and high executive salaries and low wages can be seen as two sides of the same coin.

Read the full article here.

Labels: Arthur MacEwan, ceo pay, Corporate Boards, May Day, wealth inequality, worker rights

 

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5/01/2008 12:17:00 PM 0 comments