Compensation Controversy

Morgan O'Rourke


March 1, 2010

The fervor surrounding executive compensation heated up once again, as news surfaced that the financial firms that were so instrumental in the economic meltdown and continuing recession shelled out record levels of pay in 2009 and resumed the long-standing tradition of awarding lucrative bonuses to their executives. Lawmakers and taxpayers were particularly disturbed by the banks' largesse as it comes only a year after the same banks required $700 billion in government bailouts to stay afloat and while the rest of economy still struggles toward recovery.

According to a Wall Street Journal analysis of 38 major U.S. banks and securities firms, these companies were expected to report $449.6 billion in revenue in 2009, up from $306.2 billion in 2008 and $359.7 billion in 2007. Compensation for their employees was anticipated to reach $145.8 billion dollars in 2009, an 18% increase from 2008's $123.4 billion and a 6% increase from 2007's $137.2 billion. Not only that, but according to Equilar, an executive compensation research firm, 25% of the companies that reduced executive salaries in 2008 reinstated or increased those salaries in 2009.

While financial firms have insisted that lavish salaries and bonuses are necessary to entice valuable personnel to stay with their companies in a time of crisis, many critics feel that they are not only so out of proportion with what the rest of the world makes but that they are simply rewarding incompetence-and using taxpayer money to do it.

The fact that some of these institutions have not yet reimbursed the government for $117 billion in TARP money that they received has raised the ire of President Obama, who has stated that he is determined to see that every dollar spent on bailouts is repaid one way or another.

"My determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people who have not been made whole, and who continue to face real hardship in this recession," said Obama.

The President proposed a so-called "financial responsibility fee" in the form of a tax on financial firms with assets of more than $50 billion, regardless of whether they accepted bailout money, that would help recoup unpaid bailout funds and encourage fiscally responsible behavior in the future. Other lawmakers in Congress have proposed legislation that would give shareholders a say on how executives are compensated. And at the annual World Economic Forum in Davos, Switzerland, in January, Philip Jennings, general secretary of the UNI Global Union, an international federation of trade unions, proposed that executive pay be capped at 20 times that of the average worker. Jennings pointed to the huge disparity between the pay of executives and the average employee-according to a study by the Institute for Policy Studies, in 2008, top executives in the United States took home salaries that were 319 times greater than the average worker. Meanwhile, the UK has implemented a new rule that would require banks to pay a 50% tax on any bonus money above a certain threshold.

The anger over the compensation at financial firms has not been entirely ignored. Many banks and financial firms have instituted clawback provisions that would allow them to take back pay from employees that do not perform to expectations or that have engaged in misconduct. Almost 73% of publicly traded Fortune 100 companies had such provisions in place in 2009 compared to just 17.6% in 2006, according to Equilar. Many firms have also cut pay, including Goldman Sachs, Morgan Stanley and JPMorgan Chase, which collectively set aside almost $5 billion less for pay than they did in 2007. At Goldman, in particular, compensation was set at its lowest percentage of revenue since 1999.

Bonuses have also been adjusted or cut back. Barclays executives planned to defer up to 100% of their bonuses for up to three years while employees in AIG's financial products division agreed to forgo 10% of their retention bonuses in return for early payment. The company, which was obligated to pay nearly $200 million in bonuses to its financial products staff by March 15, was also looking to recoup $26 million of 2008 bonus money that employees had pledged to return after the issue first surfaced in March of last year.

But not all bonuses are created equal. Although UBS CEO Oswald Gruebel has said he will not receive a bonus this year, his employees will. On the other hand, while Goldman Sachs capped the salary and bonuses of its London partners at £1 million, initial reports indicated that CEO Lloyd Blankfein could be receiving a staggering $100 million bonus. Common sense, or at least an acknowledgement of populist pressure and the spectre of possible legislative action, prevailed, however. Blankfein was awarded "only" $9 million in deferred stock.

Morgan O’Rourke is editor in chief of Risk Management and director of publications for the Risk & Insurance Management Society, Inc. (RIMS)