Pay Czar Ordering Bailed Out Companies to Reduce Pay
The executives of these companies had to see this coming. When a company is “too big to fail,” it becomes a public institution in senses of the phrase but the most literal. And for a number of banks and other financial companies in the past year, the public has become a partial owner thanks to infusion of cash from the government bailouts.
A company has a responsibility to do what is in the best interest of its stakeholders. For these bailed-out companies, taxpayers hold more of that stake than ever before. Those who own shares of stock in these companies want nothing more than the companies to be self-sustaining and profitable, but taxpayers, all who have lent money to the companies to help prop up their balance sheets and create liquidity, just want these loans paid back regardless of profit.
The government officially represents the taxpayers, not the shareholders, but you can be sure the government wants to see these companies profit, too. The Obama administration’s “pay czar,” Ken Feinberg, is going to determine the compensation for the highest 25 paid individuals in each of the companies that have not yet repaid government funds. The new compensation plans would reduce total pay by an average of 50% per individual and would reduce the cash portion of pay by an average of 90%.
This could benefit both taxpayers and shareholders in the short term:
- Pay reductions create an incentive for companies to pay back the taxpayers and become fully private.
- Lowering pay lowers companies’ expenses so they can report bigger profits in their quarterly an annual financial statements.
The challenge with government-mandated compensation restriction is that executives and boards of directors believe that bailed-out companies will be less appealing to the best and brightest talent. Corporate leaders who find they can only earn $40 million at Company A but could earn $80 million or more by moving to a company not partially controlled by the public might defect for greener pastures.
That sounds like a solid threat, but it’s not likely on a large scale. There are enough talented and qualified senior-level executives out there who would be happy to take the reins of a company partially owned by the government. At least, that is what Ken Feinberg is hoping.
It’s unlikely taxpayers will see bailed-out companies repay all of the money that they received. The government’s job right now is to get back as much of those funds as possible while still, to a point, preventing the companies from failing.
Photo credit: epicharmus
Wall Street Pay Cuts Stoke Debate About Washington’s Reach, Julianna Goldman, Ian Katz and Robert Schmidt, Bloomberg, October 22, 2009
Article comments
Am I the only one who wants to know where my stockholder share certificates are that should have been mailed to me after the taxpayer bailouts? It was OUR money that bailed them out. So technically, the people who are losing their homes to the same taxpayer owned banks, should have their mortgages wiped clean in exchange for the stock shares that they should now own due to the bailouts. Oh……… that’s why we teach the “No child left behind” bull in school, so you miss out on economics… Keep you stupid and take everything… Wait this has happened before in history, can anyone tell me when…. Or or we going to throw around the “trickle down economics” theory again to keep everybody going in circles?
While we are at it, where are my stock shares in the auto industry bailouts and the airline industry bailouts?????? I haven’t seen them in the mail yet……….
flexo – a little off topic, but I wanted to bring something to your attention that you may find interesting. Not sure if it warrants a post, but I know your site is one of the more popular personal finance sites out there and it may help your readers to know this is going on.
As you know, the major banks are playing all types of games to get around the new regulations that are about to be enacted. We’ve read about interest rates skyrocketing for on time payers, etc.
But here’s a new one that is of interest. I have a Citibank card and always pay the full amount on time. Ever since I had the card (it’s the only one I have) I have always received the statement in the mail mid-month and it was due during the first week of the subsequent month. So this month comes and no statement mid month. I wait a few days, and still no statement. I finally went online to check and the statement date online is 10/16/09. Makes sense since I know I always receive the statement in the mail mid-month. Anyways, it is now 10/23/09 and the statement finally came today.
My point is that I wonder if Citi is intentionally holding the mailings of the statements by a few days to allow less time between when the customer receives it and when it’s due. It would not appear to break any regulations since it appearance, they would still have the adequate number of days between the statement date and the due date.
Maybe it’s nothing, but with all the other stories out there about what the banks are doing to their customers, it wouldn’t surprise me. Thought you may want to share with your readers and give them a heads up.
@Greg – I agree with you. I think this is why they were all told to take money even if they did not really need it. After all, when this thing went down, the Bush administration already realized that this was a system wide problem. If nothing was done, all of them would need money at some point anyway.
@SteveDH – I think the “idiots” in Congress had to pass the laws that started under the previous administration because the idiots that ran the businesses (and oversight agencies) almost destroyed the capitalist system. It bothers me though that these idiots in businesses can get away with this and still get paid a bundle. I wonder if we are learning the right lessons to prevent such problems in the future. I fear we are not. – When you really think about it, a capitalist system does have some instability built into it. But I would not want it any other way.
I too am concerned that we’re not learning from this – at least we’re getting the right message across. But, you may have missed one point in my discussion: Had we not bailed them out they wouldn’t have the opportunity to be paid that bundle. Congress holds the purse strings. Neither the leadership of this or the previous administration have anything to brag about when it comes to leading a coherent and sensible approach to managing the economy. The accumulation of debt by both individuals and entities (both private & government) went unrestrained for too long. There is a price to pay for bailing out these companies. Last year our government received 2.1 trillion dollars in income. They spent 3.5 trillion. I would have had to spend 166% of my income to match this spendthrift effort BUT, my debt cannot be inherited by my kids or grandkids. The debt this country is getting into will be inherited by all of our kids.
Imagine if the government bailed out half the big institutions and companies like JPMorgan and Goldman Sachs didn’t take tarp. The stigma would have doomed those that really needed it. The government needed to create the “cover” by “bailing” out all the big guys to keep widespread panic from setting in.
Frankly on the pay, if these people made a deal for ridiculous pay, execs were crazy enough to give it, and shareholders are dumb enough not to do anything to stop it then everyone will get what they deserve. It’s a capitalist economy in action.
I think the real problem with this situation was that when the money was offered, this wasn’t on the table. I want to know how many of these companies (ignoring the ones that actually needed it to survive – i.e. Citi) would have taken the money if they knew about the strips which were to be added AFTER the money was taken? I bet not a lot. Additionally, you keep hearing about the gov’t strong arming a lot of institutions into taking the money! Which means they never wanted it! Scary Stuff
These restrictions are nothing but ego trips for the idiots in Congress. The bonus and pay numbers are small in relation to the money passing in and out of these companies. If they would have been allowed to fail, management’s future bonuses would have been ZERO. Our Congress bailed out the owners – not the management. The stockholders who allowed the “Board of Directors” to vote their shares and paid scant attention to the direction and valuation of the company they owned, do not deserve bailouts. It would have been far cheaper for the taxpayer to have replaced the deposits of the customers then it has been to bail-out the likes of Bank of America.
Peter is not the only one with concerns about power grabs, but he might want to consider the more profound transfer of wealth and the ability to earn. The Government uses their printing press and interest rates to the benefit of those who borrowed and spent and to punish those who saved. What is your nest-egg earning today compared to five years ago?
My Mother’s savings paid her $250 a month in the form of CD earning five years ago. Now it’s less than $50.00 a month. The difference was stolen by her government in order have the money to bail-outs, cash-for-clunkers, and other “spread the wealth” nonsense.
Flexo: It ain’t personal – just one of my hot buttons 😉
You do realize that 33% owned Citibank already gave 50% raises THIS YEAR to all their Directors and Managing Directors already right? $100 million to Andrew J Hall at Citi wasn’t too shabby either!
We’re regulating the top 25 execs, and nobody else. They make up less than 0.001% of the company.
America is great. I wrote an open letter to Vikram Pandit, CEO of Citi if you guys care to check it out. You and I essentially will bail them out again, just in time for another round of big bonuses.
Since the government (we) own a majority stake in these companies, I see no issue in reducing the cash portion of pay for top executives. What I do have an issue with is reducing any performance based incentives like stock options, etc. These executives need to be challenged and incentivised to get their companies back in the black. Most of these bailed out companies are trading at $1 in the market, so give the top executives 100,000 shares or something similar.
As for companies like GS, JPM, and MS who repaid their loans, don’t even think of regulating their pay. They paid their debt with interest!
You mean to say bad CEOs don’t deserve millions in Christmas bonuses?
Am I the only one that thinks these bailouts, and resulting government plays like this one seem like a huge power grab? I can’t say that I’m very comfortable with the government setting the pay for company executives. I honestly think this could result in a lot of the top talent either leaving companies, or not going to companies in the first place because they don’t want to have to be under government control.
We’ll see – i hope it does result in them paying back the government faster so that they’re no longer under their control, but who knows if the administration will even accept their repayment if they do?
I think there would be massive public backlash if the government refused to relinquish its stake in a company that had the ability to repay the bailout. I doubt that will happen. It’s more likely that a company would not be able to pay back the government. What happens then?
I’m referring to stories earlier this year where some larger companies like JP Morgan and Goldman Sachs decided they wanted to pay back the government early upon finding out some of the provisions of the TARP bill that restricted the way they could do business. They then found out about that the government was imposing some pretty high dollar costs on banks attempting to pay back TARP money ahead of schedule to make it harder for them to do so. If I remember correctly there was a bit of an uproar at the time over it..