Bailout pay cuts: One firm's pain is another's advantage
Filed under: Company News, Economy, Goldman Sachs , American International Group, INC., Bank of America, Citigroup
The U.S. Special Master on Compensation, Kenneth Feinberg, is unleashing the public's furor over Wall Street compensation on 25 lucky executives. Of course, were it not for the grace of the American taxpayer, those companies would not exist.
So, the executives at those companies should be grateful to have their jobs. But until they can pay back that TARP bailout money, their companies are going to feel the burn. And their competitors will leap with joy as they hire their best people.
The targets of government comp cop are the 25 top-paid executives at American International Group (AIG), Bank of America (BAC), Citigroup (C), General Motors and Chrysler, and the two automakers' finance arms, GMAC and Chrysler Financial. They'll suffer up to a 90 percent salary cut, according to the New York Times -- but they'll get some of that back in stock.
Then there's the little matter of perks. Instead of being lavished with them as these execs have been in the past, any executive seeking more than $25,000 in country club memberships, private planes, limousines or company-issued cars will have to apply to the government for permission. I would love to be in the meeting where they beg for those perks.
Overall, this is a plan that just longs to be scrutinized for the gap between what will be announced and what actually happens. For example, will these executives find a way around the effort to restrict their pay? Will these companies experience an exodus of the people who currently receive that high pay? Will it be easy to fill those top executive slots with competent people who are willing to accept the lower pay and tighter government scrutiny?
In the meantime, the Wall Street competitors that aren't bound by these pay restrictions will be able to hire the most talented people at AIG, BofA and Citigroup, assuming the TARP-free banks can find talent that is untainted by the failures of their current employers. This raises the uncomfortable possibility that the Treasury's comp cop will end up cutting off the noses of these seven companies to spite their faces.
I estimate that the move will trim a mere $45 million in salary, assuming that the 90 percent cut for the top 25 executives leaves them with an average salary of $200,000 per year. In other words, for relative pittance in compensation that might be saved, the government's $250 billion bailout investment could crumble as the departing talent takes customers from these wounded giants with them to their new employers.
And then there are what appear to be the special deals. For example, the Washington Post reports that the comp cop blessed the $10.5 million pay package for new AIG CEO Robert H. Benmosche. That plan would pay Benmosche $7 million a year -- $3 million in cash and $4 million in fully vested common stock -- and he'd be eligible to receive annual long-term incentive awards of up to $3.5 million.
People are still angry about banks like Goldman Sachs Group (GS), which paid back its $10 billion in TARP money and is still getting $52 billion in debt subsidies from the government. Goldman will be paying out $23 billion of the $140 billion in total 2009 Wall Street bonuses -- a year after the U.S. saved it from oblivion with the $12.9 billion, 100-cents-on-the-dollar coverage of its credit default swaps with AIG.
The U.S. can only hope that the $45 million it saves will sop up the public's anger without causing a talent drain that cuts the odds of getting that TARP money paid back. Maybe the best hope for achieving that outcome is if the sting of the pay cuts spurs those executives to pay back the TARP money faster so they can get back to the bad old days of huge pay, bonuses and perks.
The bottom line is unless we change the incentives that drive Wall Street to take huge risks, we'll be back to those days in the blink of an eye.
Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter. He owns AIG and Citigroup stock and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 3)
10-22-2009 @ 10:17AM
Andy said...
It is my fondest hope that generation Y and subsequent generations realize that these financial MBA's and U.S. Treasury officials are nothing less than organized Mafia.
NONE of them can be trusted: Henry Paulsen, Bernanke, Geithner, Robert Rubin, etc, etc, etc. They will continue stealing us blind
if not disposed of by Obama (who is being sucked in by these hoodlums.) They have NO HONOR and deserve long prison time at hard labor.
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10-22-2009 @ 10:36AM
Jerald said...
Andy, I agree with most of your comment. The exception is Obama's participation. He appointed all of the people you hold responsible for this fraud of the American public. It would appear that we have the unraveling of a conspiracy that now finds these players throwing up plans they hope will be a smoke screen to hide their activities. Unfortunately this "good ol Boy" cancer is so deep reporting a weasel to "a weasel" and expecting action against the crooked weasel is wishful thinking.
10-22-2009 @ 11:05AM
Nancy Frain said...
To Andy: And why do you think Obama put such crooks back into power?
10-22-2009 @ 11:24AM
gleeminghope said...
They are hoping that most of us are dumber than a fifth grader. But, if you start exploring on the internet and looking up these gangsters/banksters..I call them, you will shocked to see what is really going on. The wealthy are manipulating this economy. Why else would Goldmans Sachs receive $10 billion in TARP money in 2008 and now they miracously are making record profits and paying record bonuses. Please. In 9 months??? If they were that good, why did they need the TARP money? Why did George Soros purchase 3,446 shares of Goldman Sachs stock to bring his shares up to 18,000 in 2008? They are left out of the pay strategy because they paid back the $10 billion, well why did they take it to begin with? Did Soros know something? Start googling "George Soros" "Trilateral Commission" "Shadow Party" and you will find out that the rich are maniuplating and own Obama. He is just a puppet doing as he is told. Don't you find it very suspicious that just before the election the economy tanked...gas prices went up, the housing crisis failed, the banks failed..believe you me, I don't believe for one minute that it just so happened..this was a very well planned event..in my mind.
10-22-2009 @ 1:33PM
Paul said...
Obama kept some of the Bush leftovers, name me anyone else he could have chosen?, the results would be the same, don't blame a lot of these problems on them!. we are share the blame, GREED, people who had homes wanted more homes, they bought second homes and third homes for rentals, that kept first time home buyers out of the market until it went bust, they are still at it right now, these people in government only tell you what you want to hear and you are hooked, problem! HONESTY
10-22-2009 @ 10:52AM
fito said...
What talent drain? When did banking employees become rocket scientists or nuero surgeons? They are BANKERS, for crying out load.
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10-22-2009 @ 2:05PM
Dan said...
You have to think of this situation like you are the only passenger on a boat and the idea is you want to navigate correctly and make it to shore alive. Keep thinking that is the goal. Now the ship is run by thieves. Everyone one of the crew is a thieve. They run the ship though. Without them you have no chance to make it to shore alive. As much as you do not care for thieves would it be wise to toss everyone of them off the ship and into the water? If you do you have no chance of your own survival. This is a time where you have to be careful of ridding these Comapnies of their thieves. It could sink the ship ( company) and would that really be better?? I think you agree with me that it would be a hell of alot worse. Company goes under and everyone is out of a job in that company. Better to navigate and get to a safe shore before you dispatch the thieves.
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10-22-2009 @ 10:53AM
igna said...
A COMPANY GOES INTO NEGATIVE TERRITORY;
INVESTORS LOSE MOST OF THEIR INVESTED MONEY;
THE COMPANY LOSES GROUND
BUT THE CEO STILL GETS HIS HUGE PAY CHECK
AND HIS EXORBITANT BONUSES AND BENEFITS.
IF THIS IS NOT STEALING, WHAT IS IT?
WALL STREET IS CONTROLLING OUR OWN GOVERNMENT OFFICIALS WITH IT'S
LOBBYISTS WHO PAY THEM LARGE SUMS OF TAXPAYERS MONEY UNDER THE TABLE
AND ALL THIS TO CLOSE THEIR EYES AND EARS.
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10-22-2009 @ 11:02AM
almagayle50 said...
I don't undertand the premise that when these executives of failed companies with huge salaries and bonuses have those salaries and bonuses cut, they will leave and go to companies who will again pay then huge salaries and bonuses for their TALENT. What company will hire them for their TALENT. I can bankrupt a huge company. I believe I've had that talent since I was 5 or 6. I remember breaking my piggy bank at a very early age, spending it on too much candy and throwing up with a complete loss of all my funds. It really doesn't take any talent or education at all.
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10-22-2009 @ 5:30PM
lk said...
Obama's Czar is committing illegal acts. Why? It's a breach of Constitutional law, contractual law. Face it were all still pissed and what's happened with these banks and bail outs but it started with our gov's officials deregulating and pushing sub prime loans. They're was no pre existing strings prior to these banks receiving bail money, those stipulations were created after the gov screwed up yet again and again. Our gov's been breaking the laws they've created. Just my opinion of as Independent American voter who's tired of all wonderful transparency around.
10-22-2009 @ 11:11AM
mary melcher said...
Good move. But of course---no matter how good or appropriate---the slugs emerge from under their rocks to curse the President and his appointee.
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10-22-2009 @ 11:17AM
MIKE said...
SO WHEN IS THE WASHIGNTON MAFIA GOING TO GIVE UP THEIR RAISES AND PERKS,LOBBYISTS MONEY,SHOULDNT THEY SET THE EXAMPLE?
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10-22-2009 @ 11:31AM
gleeminghope said...
Right ON!! Remember the saying "People that live in glass houses shouldn't throw stones"?? Why hasn't the government made any concessions? I mean they are running huge deficits and they still get all of their pay, benefits and jets. Why?? They are a business and they are going broke, they just borrowed money from us taxpayers and China, so why don't they take a pay cut..cut out the IRS, another useless office...get the flat tax.
I understand that there should have been an agreeement signed before the TARP money was paid..and I agree that bonuses should NOT be paid until the TARP money is paid back...but, this does not include the Chrysler and GM. They are NOT paying huge bonuses..they don't have the money..they need the money..it is the greedy banks that are doing this..and the greedy bankster millionaires..Rockefeller, Buffett, Soros and the likes. The new gangster/banksters of today...
10-22-2009 @ 11:41AM
Tom said...
How about this for an " incentive" to those " top officials" in any company that received bailout money.....
Do the best job you've EVER done, for any company.....or YOUR company AND YOUR job will be history!
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10-22-2009 @ 11:43AM
Andy said...
In my humble opinion, "Ain't no SOB worth a million dollars a year!"
Yet CEOs ( with packed boards of directors) are getting multi millions $ each year plus bonuses and platinum perks!
Let's get real and let's dump these crooks.
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10-22-2009 @ 11:48AM
Consiglieri said...
We really need to take a deep breath on this issue and carefully consider the consequences - and you've done a very good job of that here.... Remember - the government ultimately needs to protect the Taxpayer's investment in these companies. How about a follow-up article that collects some viable alternatives that will keep the TARP companies on a level playing field while still addressing the issue of executive compensation in a meaningful way?
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10-22-2009 @ 12:17PM
Tad said...
I think it is time for share holders to demand, through voting their shares, reasonable compensation for short term success and greater rewards for long term achievement and loylaty to the company. Companies across America have hired and replaced CEO's every three years grossly rewarding the exiting CEO each time.
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10-22-2009 @ 12:44PM
warren said...
It is our responsibility has a stock holder to know our ceo's salary and benefits and demand fiscal responsibility
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10-22-2009 @ 12:53PM
Charlie said...
Why does Michelle Obhama need 22 aids whn all other first ladies had one or two. Her aids cost $1,315,000 of tax payers money. And why does NSA retire workers at 80% of their salary and then hire them back for more than they were making before they retired. There are 1000's of retired NSA workers double diping at NSA in maryland. Why aren"t new workers hired to replace the people retiring.
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10-22-2009 @ 12:59PM
Lord Enki said...
Lets all stand at the front door and wave them a fond farewell.
If that's their attitude then go we don't need them they are not team player's.
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