Andrew Hall, the head of Citigroup's (C) Phibro energy trading unit, wants the company to honor a previously-agreed upon compensation package that could pay him $100 million for his work in 2008, the Wall Street Journal reports. If the estimate is correct, it would harken back to the halcyon days of 2007 and then some, when even Goldman Sachs (GS) CEO Lloyd Blankfein received just $70 million for steering his firm to more than $11 billion in profits.
One important difference in such comparisons, of course, is that Goldman Sachs has repaid its government capital and is turning in profits, while Citigroup as a whole has lost tens of billions of dollars and is now a ward of (and 34 percent owned by) the U.S. government. The incident raises a host of questions about contract law and the increasingly messy interactions between politics and private business.
First, contract law. Some will say that contracts are frequently re-worked in the case of a material change to parties. This is true, but the one guaranteed way to renegotiate a compensation contract -- bankruptcy -- is not a road the government is set to allow Citigroup to travel down. The costs associated with that far exceed anything that could be saved from lowering the pay of one trader, even one who might be paid as well as Andrew Hall.
This also shows a problem that extremely diversified financial services companies have: as the consolidated entity might be teetering on the brink of insolvency, but smaller parts may still be very profitable. Is the proper way to pay employees based on the profitability of the entire company (which they have less control over), or on their own business line (whose results might not be relevant in times of crisis)? Phibro is supported by Citigroup's huge amounts of capital and low borrowing costs -- advantages that it has over a hedge fund. Because it benefits from its relationship with Citigroup, there should have to be some give-back when the parent runs into trouble.
Second, "compensation czar" Kenneth Feinberg is set to gain oversight of seven companies receiving bailout funds, including Citigroup. Feinberg will be involved in determining the total compensation of a company's top five executives and twenty highest paid employees. While the goal of holding down executive pay at companies still operating thanks to the federal government's capital is a good one, it requires a balancing act -- not killing the firms that are trying to be saved -- by chasing away talent.
Earlier in the summer I spoke with a private equity analyst, who said that the unintended consequence of TARP would be the pressure it put on high-producing non-executive employees who work at subsidiaries of rescued banks. Those traders or portfolio managers, for example, would realize that their colleagues operating without compensation oversight had a much better deal when it came time for paychecks to be dealt out, and attracting talent would be even harder than retaining it.
Whether Andrew Hall will engender the same anger as the AIG (AIG) bonus fiasco remains to be seen. But the inescapable reality is that more situations like this will arise as Wall Street's bonus-happy culture clashes with the need of politicians to win points grandstanding against such practices. Having your financial lifeline and regulator (and, in some cases, largest shareholder) fighting against your highest paid employees isn't a recipe for success -- and that should make voters everywhere ask why the government continues to play by the mantra of too-big-to-fail.
James Cullen also edits and writes at CollegeAnalysts.com. He has no personal position in the stocks mentioned above.