By Tomoeh Murakami Tse and Brady Dennis
Thursday, October 22, 2009
NEW YORK -- The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.
The cuts will affect 25 of the most highly paid executives at each of five major financial companies and two automakers, according to the sources, who spoke on the condition of anonymity because the plan has not been made public. Cash salaries will be cut by about 90 percent compared with last year, they said.
The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.
In making the ruling, the administration's "pay czar," Kenneth R. Feinberg, will be inserting the government as never before into pay decisions traditionally made in corporate boardrooms. His decree, which is expected to be announced by the Treasury Department on Thursday, will culminate a months-long review prompted by public outrage over outsize paydays at failing companies saved with taxpayer money.
The seven companies under Feinberg's purview are Citigroup, Bank of America, General Motors, Chrysler, GMAC, Chrysler Financial and American International Group. These firms have received a total of about $250 billion in bailout funds from the Troubled Assets Relief Program, adopted last year by Congress, and benefited from hundreds of billions of dollars more in government guarantees and other support.
Feinberg, who was named special master on compensation by the administration in June, has sole discretion to set compensation for the five top senior executives plus the next 20 highest-paid people at each of the seven companies. For months, he has been meeting with officials at each of the firms to negotiate executive-pay arrangements. In August, each company submitted detailed compensation plans for their top earners. Under the Treasury Department's rules, Feinberg had 60 days to make a determination after receiving the pay plans. His decisions are binding.
Under Feinberg's plan, cash salary for affected executives will go down by an average of 90 percent, according to a source with knowledge of the matter. That means an executive who received $1 million in cash salary last year would get $100,000 this year.
Feinberg has approved cash salaries of more than $1 million for about six people, and cash salaries of between $500,000 to $1 million for another half-dozen people, the source said.
But executives can still receive additional salary in stock, the source said. The portion of salary given in stock would vest immediately, although executives will have to wait two years before redeeming the shares. Even then, they will be able to cash in on only a third of that stock. The executives will be able to cash in another third after three years and the rest after four years. Because the shares are considered salary, executives get to keep the stock even if they leave their employers before they are allowed to cash in their shares.
The final component of an employee's compensation under Feinberg's plan would come in the form of long-term stock. The awards would be based on performance and could be redeemed after three years, or sooner if the company repays its government aid, the source said.
Not every employee under Feinberg's purview will receive all three components of the pay package. For example, executives at the Financial Products unit of AIG -- widely blamed for the insurer's downfall -- will receive only a base cash salary, the source said. None of the AIG unit's employees will receive more than $200,000.
Executives at Chrysler Financial -- the automaker's lending arm, which is winding down operations -- will also receive only the cash salary component, the source said.
The ruling applies only to pay for November and December of this year. There will be no clawbacks of salary already paid, aside from Bank of American chief executive Kenneth D. Lewis, who agreed to taking no compensation for 2009 and repaying about $1 million in salary he already earned. Feinberg will be making decisions on 2010 pay in January.
A Bank of America spokesman declined to comment on the reductions, saying the company had not received notification of Feinberg's final rulings. Citigroup, AIG, GM and Chrysler Financial also declined to comment.
The carmaker Chrysler said in a statement Wednesday that it has worked closely with Feinberg in developing the 2009 compensation plans for its executives. Chrysler said it is not at liberty to discuss details before Feinberg makes an announcement.
GMAC also said it had yet to be notified about his decision and declined to comment. "We have been working on a proposal that aims at embodying the principles set forth for compensation along with balancing the need to retain critical talent necessary to execute our turnaround," spokeswoman Gina Proia said.
The extent of the pay cut for most of the 175 executives will be less severe than the average for the overall group. That's because the average figure will be skewed by at least a few special cases.
For example, Citigroup initially proposed a pay package for star trader Andrew Hall that included a $100 million bonus, according to two people familiar with the matter. But the bank submitted in a revised plan after reaching a deal to sell Hall's Phibro unit to Occidental Petroleum and defer Hall's compensation until 2010, when it would no longer fall under Feinberg's purview. The revised plan now lists Hall's 2009 bonus as zero, people familiar with the matter said.
Feinberg has already exerted influence over executive compensation in several ways this year. He persuaded Bank of America's Lewis not to take any compensation for his work this year after the bank received $45 billion in government aid. Because of Lewis's contract with the bank, he is still slated to receive nearly $70 million in retirement money, something Feinberg can't legally prevent.
In addition, Feinberg has maintained that he wants future retention payments reduced at AIG Financial Products. He has advised AIG officials to scale back $198 million in retention bonuses due in March to employees at Financial Products in an effort to avoid another public uproar over pay packages at the bailed-out company.
Earlier this month, Feinberg gave his blessing to a pay package worth up to $10.5 million for AIG's new chief executive, Robert H. Benmosche. Under the plan, Benmosche would receive an annual salary of $7 million -- $3 million in cash and $4 million in fully vested common stock -- and would be eligible to receive long-term incentive awards of up to $3.5 million each year.
In recent days, top Obama administration officials have chided Wall Street firms planning to distribute big bonuses as their bottom lines rebound, noting that many of the firms continue to benefit from taxpayer assistance even as millions of Americans remain unemployed. Senior presidential adviser David Axelrod, for example, has called such planned payments offensive.
In a recent speech, President Obama himself accused large financial firms and their army of lobbyists of "mobilizing against change," adding: "They're doing what they always do -- descending on Congress, using every bit of influence they have to maintain the status quo that has maximized their profits at the expense of American consumers, despite the fact that recently a whole bunch of those same American consumers bailed them out as a consequence of the bad decisions that they made."
Dennis reported from Washington.