There seems to be no end in sight to the bailouts on Wall Street as major financial institutions falter, then turn to the federal government for rescue packages. Chief Executive Officers jump ship, golden parachutes intact, while employees lower down the totem pole walk away having lost retirement accounts, nest eggs and health care coverage. As the Treasury Secretary deliberates over the $700 billion rescue plan, discussion ought to focus on restructuring executive compensation such that shareholders have a 'say on pay'.
Recently, the federal government's rescue plan has been at the center of attention. Congress has authorized the Treasury to spend $700 billion -- $350 billion immediately; $350 billion to be fast-tracked by Congress in the future. Under the terms of the plan, better known as the Troubled Asset Relief Program, the Treasury has committed about $290 billion. According to reports in the New York Times, the Treasury has allocated $125 billion to the nine biggest banks and investment banks; another $125 billion for publicly traded regional banks; and $40 billion to expand the ongoing bailout of the insurance conglomerate American International Group. Treasury Secretary Henry Paulson has made known his intention not to use bailout money to refinance the mortgages of homeowners who are at risk of losing their homes due to foreclosure.
The scope of the federal bailout must be viewed in relation to the salaries and bonuses paid to CEOs of some of the very institutions being rescued. From 2003 to 2007, Merrill Lynch & Co. paid its chief executive the most, with Stanley O'Neal taking in $172 million and John Thain getting $86 million. James Cayne of Bear Stearns made $161 million before the company collapsed and was sold to JP Morgan Chase & Co. in June. U.S. Treasury Secretary Henry Paulson, former CEO of Goldman Sachs Group Inc., received approximately $111 million between 2003 and 2006. Lloyd Blankfein, CEO of Goldman Sachs, made $57.6 million in 2007; co-presidents Gary Cohn and Jon Winkelreid each got $56 million. The $3.1 billion paid to the top five executives from 2003 to 2007 was about three times what JP Morgan spent to buy Bear Stearns.
According to data compiled from company filings, executive compensation at the five firms (Goldman, Morgan Stanley, Merrill, Lehman Brothers Holdings Inc., and Bear Stearns) increased each year, doubling each year to $253 million in 2007. Executive compensation figures include salary, bonuses, stock and stock options, and some reward for past performance.
On September 15, Lehman Brothers filed for the biggest bankruptcy in history, more than $613 billion in debt. The same day, Merrill Lynch was sold to Bank of America for $29 a share. Goldman and Morgan Stanley, the two biggest independent U.S. investment banks, were forced to convert to bank holding companies. The fate of Bear Stearns is the stuff of financial lore. As John Waggoner writes in his book titled Bailout, "In March of 2008, the world markets woke up with one of the ugliest hangovers in history. Bear Stearns, the fifth-largest U.S. investment bank, found itself in the financial equivalent of the drunk tank: Sequestered with federal regulators and pitiless bidders for the remnants of its assets." Waggoner continues by saying, "The bubble that took down Bear Stearns had three ingredients: houses, mortgages, and mortgaged-backed securities. All three, separately, aren't usually considered a bubble cocktail. Stir them together? Ummmm. Bubbly."
So where do we go from here? Current trends towards bailouts, with the federal government buying equity in banks, has been dubbed 'socialism' by some; others find it harks back to European-styled nationalization. Amid renewed calls for congressional intervention and regulation of executive compensation, some companies are moving on their own initiative toward allowing shareholders a 'say on pay', a movement well underway in Great Britain.
Several days ago, Blockbuster Inc.'s CEO James Keyes addressed the issue of 'say on pay' at a breakfast policy seminar, outlining the company's efforts to provide greater accountability to shareholders. In 2007, a majority of Blockbuster shareholders first made the call for 'say on pay'. In March 2008, Blockbuster's Board of Directors voted to grant shareholders an annual non-binding vote on executive compensation. Beginning in 2009, shareholders will directly advise the board on whether they approve of the pay levels of the company's top executives.
According to Keyes, "We are in a period of self-regulation. Companies are looking at cost sheets, analyzing and addressing what to keep and what to get rid of. In some companies the pain is shared, in others the executive is impervious." Notwithstanding speculation about whether there are sufficient teeth in the concept of 'say on pay', Keyes held firm to the belief that the move is geared towards employees who are in it for the long haul.
Fellow panelist Vonda Brunsting, Eastern Region Director of the SEIU Capital Stewardship Program, also favors a 'say on pay'. Ms. Brunsting said, "Hopefully the era of the golden coffin, or golden parachute, is dead."
The issue of executive compensation was part of the discussion and debate in the presidential election. Only time will reveal the position to be adopted by the new administration.