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
In March 2006, my company rewarded its employees for achieving an enterprise financial milestone by offering a company stock bonus, designed to vest on March 14, 2009. The vesting period was perhaps designed to create an incentive for employees to stay with the company. When the bonus was announced, the stock grant was worth about $2,000. At the high point last year, the value of the package approached $3,000.
If the bonus were to vest today, each employee would receive the same amount of shares, but the value would only be about $300. The value of a share of my company’s stock has declined 90% from the high. To reclaim that high, the price would need to increase by 818%. That would be 5% a year for 30 years or 3% a year for 75 years. It’s probably safe to say it will be a long time before we see last year’s prices again, if ever.
I don’t see this price changing much for the better within the next week before the grant vests. I suppose I should be happy that I still have a job, although I’m considering leaving to work for myself full-time, and I should appreciate receiving this bonus in the first place.
Management says that our company’s stock price is sympathetic to the rest of the industry and the decline is not due to internal factors.
Let’s say you are the chief executive officer of a formerly strong financial company. Either your company has faltered under your leadership or you’ve managed to steer clear of toxic assets but the slumping economy has affected you. Or perhaps you are newly hired, brought in to oversee a struggling shell of a company as it tries to regain its stature.
Either your company desperately needed the funds it has received from the Troubled Asset Relief Program (TARP) or the business was competitively forced to take the handout because you wanted your company to stay on par with your peers who were bailed out.
Now President Obama wants to limit your compensation to a measley $500,000. No fair, right?
It makes sense to limit executive pay when taxpayers have stepped in to propr up your balance sheet, whether the company needed the money or not. But it’s largely symbolic, like when CEOs declare they will reduce their salary to $1 per year. They can do that for two reasons: they’ve already made a fortune, and they’ll continue to make a fortune thanks to stock options, deferred compensation, and other perks worth millions of dollars.
Obama says the CEOs can continue to be compensated above and beyond $500,000 through company stock, restricted from sale until the TARP obligations are complete and the government has been paid. This is a great deal; financial stocks have been pummeled. They may go lower, but this built-in waiting period will almost ensure that CEOs stand to win in the long-run.
What do you think about this $500,000 “limit?”
One of my concerns about the original bailout bill was that the money paid to financial institutions would be used to pay for outsized executive bonuses. While companies must offer outrageous compensation to attract and keep the best executive talent, the market place has forced the price upwards.
That worked well when the financial industry was flush with profits, but you can’t ask for assistance to avoid bankruptcy with one side of your mouth while the other side is pushing money to the top decision makers who oversaw the company’s decline into the abyss.
The Chief Executive Officer of GOldman Sachs, Lloyd Blankfein, and six other executives have announced that they will not accept bonuses for 2008. I hope that this sets a good example for other recipients of funds from the bailout.
Don’t get me wrong; these people are not hurting for cash and will likely not experience any financial difficulty at this time. Their children will still have presents to open this holiday season. But this move sends a signal that it is alright to refuse payment for horrible financial results and I hope more banks follow suit.
Thanks to All Financial Matters, where I first saw this story posted.
Update: UBS has joined Goldman Sachs in the no-bonus crusade.
Blankfein, Goldman Deputies Decide to Forgo Bonuses, Christine Harper, Bloomberg, November 17, 2008
Top Executives at UBS Will Not Get Bonuses, Ben White and David Jolly, New York Times, November 17, 2008
America’s 20 Best Health Plans. Unsurprisingly, my plan is not on this list from MSN and US News & World Report. The top award goes to Harvard Pilgrim Health Care of New England in Maine and Massachusetts. I should take advantage of my Aetna plan more by visiting a doctor for a check-up once in a while, particularly since the price of my plan is going up next year.
Aflac CEO Says He’ll Give Up Golden Parachute if Ousted. Aflac, which isn’t seeking bailout money from the government, would owe Dan Amos $13 million if a merger or acquisition results in the elimination of his job. Amos has graciously volunteered to give up this income if he leaves the company in these circumstances. He’s setting an example for other highly-paid CEOs who plan on taking windfall compensation even as their companies fail or ask the public for handouts.
76% Say Obama Can Fix Economy – Poll. No pressure, though. Meanwhile, Bush and 19 other world leaders from developed and developing countries are meeting in Washington to discuss the financial crisis. While expectations are probably too high for the meeting, it will be interesting to see if anything comes from it.
Citigroup to Lay Off Another 10,000 – Report. Even after Citi received $25 billion from the government, we can expect more lay offs and significantly higher interest rates on consumer credit cards.
For the “News and Blogs” features, which I plan to run almost daily as long as I have additional articles to share, I select some of the most interesting posts from my RSS reader and from pfblogs.org. If you don’t believe you blog is included on my RSS reader, please let me know to so I can add it. Thanks!
News and Blogs sponsor: FNBO Direct, currently offering 3.25% APY
Email this article
Print this article
