More Pay Cuts

By Lisa Valentine

Bank of America’s chief Ken Lewis, who we recently reported will receive no pay and no bonus, isn’t the only executive to get a pay cut. The U.S. Treasury’s Special Master on Compensation Kenneth Feinberg has announced that he will have the last word on the amount of compensation collected by the five most senior executives and the next 20 most highly compensated employees in seven firms receiving “exceptional” TARP assistance.

Those firms are AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial.

Noticeably missing from the list are Fannie Mae and Freddie Mac—the government lending agencies slated to receive $290 billion in federal subsidies in 2009, according to The Pew Charitable Trusts. Do you think it’s any coincidence that President Obama nominated Fannie Mae Chief Executive Officer Herb Allison to run the Treasury office overseeing the $700 billion bank rescue?

Here are a few of the highlights of the Special Master’s decree:

• No cash bonuses based on short-term performance.
• Bonuses should be in the form of company stock that must be held for the long-term, sold only in one-third installments beginning in 2011 (or earlier if the firm repays TARP). Stock is immediately vested to ensure that execs have skin in the game.
• Limit salaries to $500,000 (although Feinberg does say that “exceptions where necessary to retain talent and protect taxpayer interests” will be allowed. He’s allowed a salary greater than $1 million for the new AIG CEO ad two employees of Chrysler Financial).
• Executives must meet goals set in consultation with the Special Master.
• Incentive awards can be paid only if the executive provides three years of service to the firm after the award is made.
• Limits on “golden parachute” severance packages.

As a result of this edict, Feinberg reports that cash compensation for these execs decreased by more than 90% and the total compensation decreased by more than 50%.

Treasury Secretary Tim Geithner released the following statements to support the Special Master: “We gave [Feinberg] the difficult task of cutting excessive pay, striking a balance between compensations and risk taking, and keeping strong management teams in place to help the companies recover—all in the public interest.”

In some altered sense of realty, does Geithner really think that these actions will keep strong management teams in place?  The executives are bailing out. According to the Washington Post, 14 of the 25 highest paid Bank of America executives have already left. At AIG, only 12 of the top 25 executives remain.

Having the government determine pay is ludicrous. Let the firms (and their shareholders) set their own rules. For example, Credit Suisse recently announced that it was introducing a new bonus payout plan to link awards to the bank’s profitability. That makes much more sense that letting pay be dictated by a Special Master.