On This Day
Are Top Executives Overpaid?
by
findingDulcinea Staff
Billions of dollars’ worth of sub-prime losses have not stopped some financial giants from doling out multimillion-dollar severance packages and bonuses.
30-Second Summary
Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns are giving out $39 billion in bonuses for 2007 despite posting huge losses in the past year, Bloomberg News reported.
That figure tops the 2006 total of $36 billion in bonuses. However, unlike last year, 2006 was a year of record profits. In 2007, the financial industry posted record losses after the collapse of the sub-prime market. The firms have shed a quarter of their value, announced thousands of job cuts and reduced bonuses for the rank and file.
However, according to MarketWatch’s David Weidner, outgoing CEOs Charles Prince of Citigroup and Stanley O’Neal of Merrill Lynch received generous sendoffs: their severance packages averaged $100 million.
Losses need to be reflected in executive pay, says Raghuram Rajan, a professor at the Graduate School of Business at the University of Chicago. In a Financial Times article that stirred a lot of debate in the press and on the Web, Rajan proposed that the bonuses of underperforming CEOs be recalled, or “clawed back,” to cover the bonuses of employees who did well in 2007.
Reactions to Rajan’s proposal ranged from enthusiastic approval to outright rejection. One commentator taking issue with Rajan writes that the claw-back mechanism will hamper hiring on Wall Street, while The New York Times called the proposal an “interesting theory” but a practical “non-starter.”
Observers have long claimed that executives are overpaid—even in good times. They usually point out the huge gulf between the paychecks of executives and the average workers.
For others, such comparisons are meaningless. Executives shoulder much more responsibility and usually come with degrees from the country’s top universities, writes Fred Whittlesey, chief compensation officer at PayScale. Putting arbitrary caps on executive pay is like putting a ceiling on rock bands’ earnings, he writes.
That figure tops the 2006 total of $36 billion in bonuses. However, unlike last year, 2006 was a year of record profits. In 2007, the financial industry posted record losses after the collapse of the sub-prime market. The firms have shed a quarter of their value, announced thousands of job cuts and reduced bonuses for the rank and file.
However, according to MarketWatch’s David Weidner, outgoing CEOs Charles Prince of Citigroup and Stanley O’Neal of Merrill Lynch received generous sendoffs: their severance packages averaged $100 million.
Losses need to be reflected in executive pay, says Raghuram Rajan, a professor at the Graduate School of Business at the University of Chicago. In a Financial Times article that stirred a lot of debate in the press and on the Web, Rajan proposed that the bonuses of underperforming CEOs be recalled, or “clawed back,” to cover the bonuses of employees who did well in 2007.
Reactions to Rajan’s proposal ranged from enthusiastic approval to outright rejection. One commentator taking issue with Rajan writes that the claw-back mechanism will hamper hiring on Wall Street, while The New York Times called the proposal an “interesting theory” but a practical “non-starter.”
Observers have long claimed that executives are overpaid—even in good times. They usually point out the huge gulf between the paychecks of executives and the average workers.
For others, such comparisons are meaningless. Executives shoulder much more responsibility and usually come with degrees from the country’s top universities, writes Fred Whittlesey, chief compensation officer at PayScale. Putting arbitrary caps on executive pay is like putting a ceiling on rock bands’ earnings, he writes.
Headline Links: Bonuses up, economy down
Five of Wall Street’s biggest firms are giving out $39 billion in bonuses and benefits for 2007 after posting some of the worst quarterly losses in their history and losing shareholders over $80 billion. Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns have shed a quarter of their value. Yet, the sum total of this year's bonuses is greater than the gross domestic product of Sri Lanka, Lebanon and Bulgaria combined.
Source: Bloomberg News
The $39 billion in bonuses arrives after Bear Stearns's and Morgan Stanley’s chief executives forfeited their 2007 bonuses. “That combined total—$39 billion—would be a remarkable sum in any year, but it’s especially remarkable given the firms’ generally dismal results,” a New York Times DealBook op-ed writes. The New York Times also reports on the proposal in the Financial Times by Raghuram Rajan, professor at the Graduate School of Business at the University of Chicago. Rajan said investment banks should take back bonuses given out in previous years to underperforming CEOs. In fact, such “claw-backs” should be part of compensation packages from the very start. Responses to the proposal have been mixed—from gushing approval to outright rejection, the Times reports.
Source: The New York Times
Background: Pain elsewhere on Wall Street
In December 2007, Reuters reported that Wall Street bonuses had generally decreased in 2007 compared with 2006. Job security is an issue for many, as firms announced that they will cut jobs in an effort to offset losses incurred in the sub-prime meltdown. Individual payouts varied significantly, according to Reuters.
Source: Reuters
Merrill Lynch’s new chief, John A. Thain, said that his company's management style will have to change, The New York Times reported. One of the changes will be a shift away from individual performance and a greater emphasis on group success. Employees received bonuses that included more stock than they have in the past.
Source: The New York Times
On Jan. 17, Merrill Lynch reported a record loss of $10 billion in the fourth quarter. The losses have eliminated a quarter of the company’s value. Analysts predict a further loss of value as the economy slows. The company named a new CEO and a new co-chief risk officer.
Source: MarketWatch
Bear Stearns said it will replace current chief executive James Cayne with Alan Schwartz. Cayne will reassume his old position of board chairman. Bear Stearns was one of the hardest hit by the sub-prime collapse, and even though the former CEO and other top executives forfeited their bonuses for 2007, Cayne’s continued presence at the company has Punk Ziegel & Co. analyst Dick Bove worried. Cayne's "maintaining the post of chairman is totally inappropriate and an indication that this company’s board has no intention of placing the shareholder first," Bove said.
Source: MarketWatch
On Jan. 15, Citigroup announced its first quarterly loss since 1998. It was worth a staggering $9.83 billion. So far, Citi has written down $18 billion and slashed its dividend by 41 percent. Revenue fell 70 percent, MarketWatch reported.
Source: MarketWatch
Opinion & Analysis: Executive pay should be cut back
Pro
The losses banks have suffered should be reflected in employee compensation, argues Raghuram Rajan, professor of finance at the Graduate School of Business at the University of Chicago. Rajan suggests banks should take back the bonuses underperforming CEOs got for the past few years and redistribute them among those who did well last year.
Source: Financial Times
Ex-CEOs Stanley O’Neal and Charles Prince messed up, but they still received generous compensation packages when they left. Their packages averaged $100 million, according to MarketWatch’s David Weidner. “They've also been retired, not fired, which means more perks and a little dignity, even if we know better,” Weidner writes. The brunt of the sub-prime losses is born by the rank and file, who saw lower bonuses while some feared for their jobs. It is almost not worth running a profitable investment bank, Weidner writes, given that severance pay dwarves bonuses to successful CEOs.
Source: MarketWatch
Contra
According to Fred Whittlesey, chief compensation officer at PayScale, comparing CEO pay with the pay of average workers is meaningless. CEO jobs require high levels of education and responsibility. That said, billions have been paid to undeserving executives, but there are also instances in which average workers are overcompensated. “If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations ... Putting arbitrary caps on executive pay is like putting a ceiling on rock band earnings," Whittlesey writes.
Source: CNet.com
Time columnist Justin Fox argues that building in “claw-back” schemes into payment packages would hinder Wall Street hiring. “But why, when times are good, would anybody take a job at a firm with clawbacks built into the compensation plan? That's why this hasn't happened and I can't really see how it will happen unless the market for Wall Street talent totally collapses,” Fox writes.
Source: Time
Reference Material: SEC executive pay tool
The Securities and Exchange Commission provides a Web tool that compares executive pay at 500 U.S. companies. The tool was launched about a year after SEC strengthened rules regulating executive pay disclosure.
Source: The SEC
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