By Frank Ahrens
Washington Post Staff Writer
Saturday, January 31, 2009
In times of prosperity, Wall Street executives are highly paid heroes to be emulated. Eye-popping corporate profits and pocket-lining dividends are celebrated like Super Bowl wins and Oscar sweeps.
In bad times, like now, the Wall Street Gotbucks find themselves fallen idols on the wrong side of a quick and vicious shift, chastised by President Obama, powerful senators and subpoena-wielding lawmen. Not to mention angry taxpayers who lost savings on Wall Street and who now fund its bailout.
President Obama called "shameful" a Thursday report from the New York comptroller that showed Wall Street firms awarded $18.4 billion in bonuses in 2008, one of the worst years ever on the Street. With U.S. unemployment at 7.2 percent and climbing, 401(k) accounts dwindling, bankruptcies piling up and foreclosures still spreading, many Americans might agree with Obama.
To that end, Democratic lawmakers have attempted to limit bonuses at companies getting a piece of the $700 billion federal government bailout. Sen. Christopher J. Dodd (D-Conn.), head of the Banking Committee, vowed on Thursday to use "every possible legal means" to recoup the $18.4 billion in Wall Street bonuses. New York Attorney General Andrew M. Cuomo has subpoenaed former Merrill Lynch chief executive John A. Thain over $4 billion in bonuses he pushed through just before Merrill was acquired by Bank of America last year.
The outrage extends beyond bonuses. Companies on the federal dole should be forced to radically cut their dividends, Obama economic adviser Lawrence H. Summers said. Treasury Secretary Timothy F. Geithner flatly told Citigroup, which has received $45 billion in taxpayer money so far, not to buy a new $50 million jet. Exxon Mobil reported a record 2008 profit of $45 billion yesterday, stoking the outrage.
In the middle of a recession, such headlines stir up populist outrage and illustrate a fundamental disconnect between Main Street and Wall Street. Unlike working stiffs who toil for a regular paycheck -- and that's it -- top-ranking executives at big companies get the bulk of their compensation from a complex suite of bonuses. For instance, in 2007, Exxon Mobil chief executive Rex W. Tillerson received $16.7 million in total compensation. But Tillerson's salary was only $1.8 million; most of the rest came from bonuses and awards.
Big companies have long paid their top executives in performance-based bonuses: the better their company does, the more money they get. Companies have maintained that bonuses are an essential tool for recruiting, rewarding and retaining talented executives.
But are some people worth more than others? That much more?
"Most people would agree that some people should make more than others, whether that's based on skill level or education," said Alexander Cwirko-Godycki, research manager at Equilar, an executive compensation analysis firm. "It comes down to each individual's perception of what appropriate is. Is it $100,000? 10 million? 100 million?"
Which is why, he said, "putting outright caps on compensation is very problematic."
The unpredictability of the economy is making it difficult for companies to set bonus requirements going forward, Cwirko-Godycki said. Typically, companies evaluate an executive's performance over at least one year. But some companies now are setting six- or even three-month goals for bonuses, he said.
Lost in the heated rhetoric of the comptroller's $18.4 billion bonus total for 2008 was this fact: Even though that number represented the sixth-highest bonus year on record, it was down 44 percent from the total amount of bonuses paid on Wall Street in 2007. The falloff is proportional to the drop in the Dow Jones industrial average from its high of 14,164 in October 2007 to 8000, where the Dow closed yesterday.
Also: The 2008 bonus bust will cost New York state nearly $1 billion in personal income tax revenue and New York City another $275 million.
Executive compensation had been slowing across the entire range of the Standard & Poor's 500-stock index companies even before the recent outrage, Cwirko-Godycki said.
Total chief executive pay among the S&P 500 rose 6 percent from 2005 to 2006, Cwirko-Godycki said. But it increased only 1.3 percent from 2006 to 2007. Reason? The median bonus for the S&P 500 chief executive dropped 4.9 percent from 2006 to 2007, he said.
Can or should anything be done about executive bonuses?
Yes, said Nell Minow, chairman of the Corporate Library, a research firm on corporate governance, who noted that Wall Street bonuses are forcing her to "keep recalibrating my outrage."
Minow, an expert on boards of directors, noted that boards approve all bonuses. All too often, she said, they were not rigorous enough in their review or smart enough to understand their company.
As an example, she cited Bear Stearns, the first big investment bank to fail and a voracious consumer of subprime mortgages, which the bank packaged and sold to great profit.
Bear Stearns executives got their bonuses based on the quantity of mortgages they securitized, Minow said, not the quality.
Further, she said, even though the BearStearns board set up nine criteria on which to evaluate executive performance, it could award bonuses even if none were met.
Minow said all executives should follow the bonus structure of former Chrysler chief Lee Iacocca and former Disney chairman Michael Eisner, who took their bonuses in "steeply escalated" stock options over several years, betting on themselves and on their company.
"You want to get rich? Fine. We want you to get rich; the sky's the limit," Minow said, "But you're going to get rich by doing a really great job. No one complains that Bill Gates made too much money -- he created value."