Firms stumble, but CEOs cash in

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by Russ Wiles - May. 25, 2008 12:00 AM

The Arizona Republic

Twenty big financial firms that got caught on the wrong side of the credit crunch suffered nearly $500 billion in cumulative stock-market losses last year and have brought the economy to the brink of recession.

Yet these firms still managed to shell out about $215 million collectively in compensation to their chief executive officers last year.

Proxy filings by the nation's top banking, insurance and securities firms portray a picture of some belt-tightening, with many financial-firm CEOs bringing home smaller paychecks than in 2006 and several chieftains losing their jobs.

Still, most of the affected firms offered generous compensation packages to their top executives in salaries, bonuses and, especially, stock and option awards.

Such largesse stands out at a time when the financial industry suffered through its worst year in more than a decade and almost paralyzed the broad economy through the contraction of credit. In mid-March, lenders and investors deserted Bear Stearns, leaving the investment bank near collapse before the Federal Reserve and JPMorgan Chase came to the rescue.

Examples of eyebrow-raising compensation packages abound:

• The head of residential lender Countrywide Financial earned nearly $11 million last year despite his firm's brush with bankruptcy.

• Student-loan financier Sallie Mae, also known as SLM Corp., had three principal executive officers in 2007. One of them resigned after earning compensation of $27.1 million for less than half the year.

• Merrill Lynch's former CEO, E. Stanley O'Neal, retired with a $118 million termination package and $24.3 million in regular compensation despite a $7.8 billion loss for the firm in 2007.

These and other CEO totals would be bloated further if they included realized gains on stock options and awards and other compensation. But the U.S. Securities and Exchange Commission, which regulates how public companies report executive pay, does not require firms to list all of that in summary compensation tables.

Pay for performance

CEO pay always has been a contentious topic. It's difficult to gauge exactly what a top executive is worth, especially when rival firms are paying much the same.

CEOs at large U.S. firms earned 364 times that of average workers last year, according to a study by United for a Fair Economy and the Institute for Policy Studies. Essentially, big-firm CEOs make as much in a day as the typical American earns in a year.

Corporate directors who decide on compensation figures defend the need to reward top talent with top compensation. That argument is easier to support during years when profits and stock prices are rising, but it's harder to uphold when company fortunes slide, especially when corporate missteps imperil the global economy.

"CEO pay is always a flashpoint for shareholders anyway," said Shirley Westcott, a managing director at Proxy Governance, a corporate-governance research firm in Vienna, Va. "In a down economy, when you see CEOs still making a lot of money when their companies aren't performing, it brings out more investor activism."

Eye-popping numbers?

The poor performance of big financial firms last year has put many CEOs and the directors who approve their pay packages under the spotlight. Including the other top five or so executives at each company, total compensation paid by the 20 financial firms topped $750 million last year.

Such results kindle the debate on just how closely executive pay is tied to performance.

"Financial firms, especially investment banks, tend to pay well anyway," Westcott said. "Without the subprime meltdown, you'd have to wonder what they would have made."

One poster child for distress is Countrywide Financial, which lost $700 million last year and teetered on the brink before an equity infusion by Bank of America. The residential lender's CEO, Angelo Mozilo, kept his job, though his compensation got slashed to $10.8 million last year from $51.8 million in 2006.

Citigroup's CEO, Charles Prince, wasn't as lucky. He resigned late last year amid the firm's startling reversal that showed up in a $5.1 billion quarterly loss earlier this year and an infusion of cash by foreign investment funds. Prince's compensation of $15.1 mil- lion in 2007 compared with $29.1 million in 2006.

Such packages haven't gone unnoticed. Several CEOs were grilled on Capitol Hill by members of Congress, and the financial press has kept the issue alive.

Forbes, for example, cited Mozilo and IndyMac Bancorp CEO Michael W. Perry among the "worst-performing bosses."

CTW Investment Group, an affiliate of the Change to Win union coalition, staged a "vote no" campaign against board members at Merrill Lynch, Citigroup and four other financial giants - Bank of America, Morgan Stanley, Wachovia and Washington Mutual.

The campaign spurred director resignations and pledges by some boards to reform corporate-governance practices.

"These were the U.S. banks that took the largest subprime write-downs and losses and sustained the largest loss to shareholder value due to the subprime mess," said Michael Garland, director of value strategies at CTW in New York.

"At all the firms, we were concerned about a broad failure (of director oversight)."

Although rising executive pay may have seemed as predictable as sunsets, 16 of the 20 financial CEOs took home less money last year compared with 2006, based on proxy disclosures. Also, several firms have cut CEO benefits such as country-club memberships and lavish auto allowances.

Even Merrill Lynch, which gave O'Neal nearly $600,000 in perks in 2007 including a $209,000 auto allowance, is changing. The firm says it no longer will let executives use its aircraft for personal trips.

Broad impact

None of the 20 financial firms is based in Arizona, and several don't have a significant presence here. Still, it's likely several hundred thousand or more Arizonans have stakes in the firms through direct stock ownership or via mutual funds or pension funds.

The firms' losses or sharp drops in profit also have contributed to the credit crunch and, in turn, weakness in the overall economy.

The three big banks operating in Arizona - JPMorgan Chase, Bank of America and Wells Fargo - all have taken hits but have managed to stay profitable.

Of the three, Bank of America felt the biggest jolt, with its profit sliding 77 percent in the first quarter of 2008 and its shares shedding $61 billion of value in 2007. The compensation of BofA CEO Kenneth D. Lewis dipped 11 percent last year to $24.8 million.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

http://www.azcentral.com/business/articles...ncepay0518.html