By Jia Lynn Y
Washington Post Staff Writer
Saturday, July 24, 2010; A09
The government's pay czar scolded 17 banks for handing out $1.6 billion in excess executive pay while benefiting from taxpayer bailout funds at the height of the financial crisis. But he will not force banks to return any of the money.
Kenneth Feinberg, who was appointed as the Obama administration's special master for compensation, said the offending firms gave out payments that were "ill-advised," but that they did not act against the public interest or break the law.
The firms that paid too much, according to the report released by Feinberg on Friday, include the country's biggest banks: Citigroup, Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley.
Citigroup, which received $45 billion in bailout help, was the worst offender, handing out $400 million in excess pay, according to a government source close to the investigation. Much of the money went to executives at Citigroup's successful energy trading unit, Phibro.
Other large banks formed a second tier of excess pay, followed by the smallest banks of the group.
Feinberg examined payouts at the 419 firms that received taxpayer assistance, focusing on executives who were paid more than $500,000 during a handful of months from late 2008 to early 2009. In determining excess pay, Feinberg used his judgment while examining two pieces of criteria: the amount of the payout and whether there was enough justification for the pay.
"This is armchair quarterbacking," said Feinberg, adding that he looked back at events from two years ago with "some reluctance" because he was second-guessing decisions made by others.
Of the 17 companies that he found were egregious in their compensation, 11 have repaid the assistance received from taxpayers.
Friday's report recommends that companies adopt an emergency provision that would allow them to break pay contracts if another financial crisis were to occur. If the company's board determined that the firm was in a crisis, the compensation committee would be allowed to revisit pay levels. During the recent banking meltdown, many companies protested that they were legally obligated to honor their payment contracts with executives.
Feinberg said all 17 companies have agreed to consider such an option.
"Getting our compensation structure right is a priority for us," Citigroup said in a statement. "Since the crisis, we have done a lot of work to make sure it's performance-based and we look forward to reviewing the Special Master's recommendations."
Compensation experts, however, questioned a system where banks could lower pay for top executives in the midst of steering their firms through trouble.
"He's saying, 'If you're in the crisis already, we can renege on the deal.' What if you're two steps away? Who would want to work there?" said Alan Johnson, an executive compensation consultant who specializes in the financial services industry.
"It sounds great at 10,000 feet," Johnson added. "But in the real world, it would be impossible."
Experts also doubted that banks would voluntarily adopt such rules. Steven Hall, a compensation consultant, pointed out that Citigroup generously paid executives at Phibro because it was a profitable unit. The company couldn't afford to lose star performers, especially while other parts of the firm were struggling, he said. Citigroup eventually sold Phibro after receiving pressure from Feinberg about pay.
"If you're not going to pay those people, they're not going to stay," Hall said. "You're not going to have a viable business."
But critics pointed out that bank executives need to be held accountable for bad performance.
"One of the most common-sense and kind of the bare minimum things you could do would be to say, 'If your company is tanking, you don't get paid as if it was flying high,' " said Heather McGhee, director of the Washington office of Demos, a liberal think tank.
"Any company could change their compensation practices at any time," she added. "That's not making Wall Street pay for what it did.
The excessive pay was reported at only a small group of the 419 firms examined. The report found that out of the entire pool of firms receiving taxpayer funds, 240 did not give more than $500,000 to any of the top 25 executives. A subset of 116 firms handed out this amount to five or fewer executives.
The pay czar has forced banks to change their compensation practices before. Last October, Feinberg ordered companies that received the largest amounts of bailout money to cut compensation for their highest-paid executives by about half.
Other companies singled out by Feinberg include McLean-based Capital One, AIG, American Express, Wells Fargo, Boston Private Financial Holdings, CIT, M&T Bank, SunTrust, Bank of New York Mellon, Regions Financial, PNC Financial and U.S. Bancorp.
The report declined to name individual executives whose pay was deemed excessive. Feinberg said he didn't want his findings to trigger a round of private lawsuits and congressional hearings.
"I think it's sufficient they voluntarily accept this [pay contract] break position, that we all move forward with lessons learned and that we put this sad chapter behind us and look forward," said Feinberg, who will soon shift his attention to overseeing the $20 billion BP oil spill compensation fund.