So much for Wall Street sobering up.
Under pressure to prevent another meltdown, Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) have been cutting back on cash bonuses and insisting on so-called claw-backs — arrangements that allow companies to reclaim past bonuses when there is employee misconduct.
Yet for all their supposed reform-mindedness, the banks show no sign of pulling the emergency brake on the great compensation escalator.
A year after taxpayers saved the finance industry from collapse, the big banks will hand out billions of dollars in bonuses in the coming weeks — at a time where unemployment tops 10% and many people are still losing their homes to foreclosures. To say this rankles in some quarters is an understatement.
Archive for December, 2009
So much for Wall Street sobering up.
Published in The Wall Street Journal, December 29, 2009 by Aaron Lucchetti
Morgan Stanley is poised to overhaul the way it pays its most senior executives, deferring more of their compensation over time and benchmarking their pay against rival firms, according to people familiar with the matter.
But the investment bank may stop short of the approach taken by Goldman Sachs Group Inc., which said its top executives would receive only stock for 2009 bonuses. Senior Morgan Stanley executives may receive about one quarter of their 2009 pay in cash, with the rest coming as deferred stock, one of the people familiar with the matter said. In recent years many received more of their pay in cash.
Wall Street pay has become a fraught issue for firms such as Morgan Stanley, whose top executives have conceded they may have failed without emergency government support in late 2008. With trading and banking profits now improving, Wall Street is trying to calibrate pay to minimize outside criticism and yet still keep employees and executives happy.
Published in The Wall Street Journal December 29, 2009by Serena Ng and Joann S. Lublin
American International Group Inc. is preparing to pay its outgoing general counsel Anastasia Kelly several million dollars in severance after she resigned over federal pay curbs, according to people familiar with the matter.
AIG determined that its top in-house lawyer was entitled to the money under the company’s severance plan, whose terms say certain executives can resign and collect severance if their pay is reduced significantly, the people said. The move comes amid recent scrutiny of Ms. Kelly’s actions in a December pay dispute involving her and four other senior executives. AIG’s board engaged an outside law firm, Orrick, Herrington & Sutcliffe LLP, this month to review Ms. Kelly’s actions after she advised other executives on what they could do to protect their rights to collect severance benefits. Ms. Kelly also helped them arrange for outside counsel, a spokesman for her has previously said.
YOU might think that board members overseeing businesses that cratered in the credit crisis would be disqualified from serving as directors at other public companies.
You would, however, be wrong.
Directors who were supposedly minding the store as disaster struck at companies like Countrywide Financial, Washington Mutual or Fannie Mae have not all been banished from other boardrooms. In many cases, directors just seem to skate away from company woes that occurred on their watch.
To some investors, this is an example of the refusal of those involved in the debacle to accept responsibility for it. Whether you are talking about top executives loading up on leverage, regulators who slept while companies took on titanic risks or mortgage lenders that made thousands of dubious loans, few in this crowd have acknowledged culpability. Taxpayers and shareholders, meanwhile, who had nothing to do with the problems, are left holding the bag.
Why does it seem that it’s always Christmas in corporate boardrooms? And how can investors tell whether those glittering pay packages are worth the cost?
The answer sounds obvious: Pay the boss more for good results now, and you should get even better results later. But the evidence for that is surprisingly weak, and two new studies even suggest that when chief executive officers get paid more, shareholders end up earning less.
The first study, led by corporate-governance expert Lucian Bebchuk of Harvard Law School, looked at more than 2,000 companies to see what share of the total compensation earned by the top five executives went to the CEO. The researchers call this number—which averages about 35%—the “CEO pay slice.”
It turns out that the bigger the CEO’s slice of the pie, the lower the company’s future profitability and market valuation. “These CEOs,” says Prof. Bebchuk, “seem to be trying to grab more than they should.”
Finance professor Raghavendra Rau of Purdue University and two colleagues looked at CEO pay and stock returns for roughly 1,500 companies per year from 1994 through 2006. They found that the 10% of firms with the highest-paid CEOs produce stock returns that lag their industry peers by more than 12 percentage points, cumulatively, over the next five years.
An academic argues that perks and golden parachutes may be beneficial to shareholders, and that it is possible to design a compensation plan agreeable to executives, shareholders, and watchdog groups. How can that be? Meet Henrik Cronqvist, assistant professor of financial economics at the Robert Day School of Economics and Finance at Claremont McKenna College.
Corporate Board Member: You’ve suggested that annual cash bonuses should be based on measures that can’t be easily manipulated through accounting practices adopted by management. What types of measures are you referring to?
Henrik Cronqvist: Yes. The preferred measures are those that are all types such as EBITDA: earnings before interest, taxes, depreciation, and amortization. That could be one measure. It’s cash flow based, so in that sense it might be a better measure compared to earnings-based measures that may more easily be manipulated. No measure is likely to be perfect, however. It’s more a question of finding something that is more reasonable, therefore cash flow based measures seem to be favored over earnings based measures.
Companies are alarmed at potentially costly provisions in the Senate health-care bill, many of which they hope will be scrapped during a final round of negotiations early next year.
A scramble to massage the hefty measure, instead of pushing to kill it, reflects the view of many in the business community that a sweeping remake of the U.S. health-care system now appears inevitable.
The U.S. Chamber of Commerce is among a few big business groups calling for Congress to scrap the overhaul effort.
Business is worried that President Barack Obama’s push to extend coverage to millions more Americans will raise the burden on employers. Business groups have widely criticized the 2,074-page Senate bill, which looks set for passage on Christmas Eve. They also have offered a variety of fixes.
The legislation’s scale and complexity, plus uncertainty over how the Senate bill will be meshed with the version that passed the House in November, make it difficult for most companies to gauge the effect it will have on the bottom line.
“We’re still committed to the notion that health reform can be done right, but I know of no company that is warmly embracing what is in either the House or Senate bills,” said Paul Dennett, top health-care adviser to the American Benefits Council, an advocacy group for large employers.
Under other circumstances, this would have been a year to savour in the long, rapid ascent of Lloyd Blankfein. Goldman Sachs, the investment bank he has led for three years, not only navigated the 2008 global financial crisis better than others on Wall Street but is set to make record profits, and pay up to $23bn (€16bn, £14bn) in bonuses to its 31,700 staff.
For Mr Blankfein, a scholarship boy from the Bronx whose first financial job at Goldman was selling gold coins in its commodities trading arm, has prospered to an extent that was implausible even 10 years ago, when it became a public company. Its influence has spread throughout the world, from New York and London to Shanghai and São Paulo.
A good slice of its success is attributable to Mr Blankfein, a tough, bright, funny (everyone remarks upon his unpretentious, wisecracking manner) financier who reoriented Goldman. Under his leadership, trading and risk-taking have pushed to the fore, reducing the influence of its investment banking advisers.
Published in The Washington Post December 22, 2009 by Brady Dennis
When word spread earlier this year that American International Group had paid more than $165 million in retention bonuses at the division that had precipitated the company’s downfall, outrage erupted, with employees getting death threats and President Obama urging that every legal avenue be pursued to block the payments.
New York Attorney General Andrew M. Cuomo threatened to publicize the recipients’ names, prompting executives at AIG Financial Products to hastily agree to return about $45 million in bonuses by the end of the year.
But as the final days of 2009 tick away, a majority of that money remains unpaid. Only about $19 million has been given back, according to a report by the special inspector general for the government’s bailout program.
Some of the employees who had offered to return their bonuses have instead left the company, taking their cash with them.
Others remain at Financial Products but are also holding on to their money until they see what Kenneth R. Feinberg, the Obama administration’s “compensation czar,” decides about whether they should get future bonus payments they have also been promised. Feinberg, AIG and government officials have been involved in ongoing negotiations over the status of past and future bonuses at the insurance giant.
Expert Perspective by Grahall OmniMedia Editorial Board
In the December 14, 2009 Wall Street Journal article “HR Executives Suddenly Get Hot“ author Joann S. Lublin says: “Once considered denizens of a corporate backwater, more human-resources executives are being tapped to serve as outside directors because many have become strategic players with bottom-line impact. U.S. companies wooing them seek their insight on hot-button issues such as executive pay, management succession and integrating acquisitions. “
In our response to this article we thought we might channel some Charles Dickens and his classic story A Christmas Carol. Let’s start with some Ebenezer Scrooge-like skepticism.
Continue reading “Bah, humbug” »