Corporate Governance

The Continuing Problem of Executive Compensation

By J. Robert Brown

The House has passed an executive compensation reform proposal and the SEC has continued to bring enforcement actions. 

In the real world, however, things seem little different than before the crisis began.  As the London Times noted, "Big bonuses, small changes."  First, ten financial institutions have paid off the TARP money and gotten out from underneath the legal restrictions on compensation.  At least two of them, Goldman and JP Morgan, have been bountiful in their bonus payments.  As the article notes:

• While average bonuses were big enough, a lucky few, roughly 5,000 people, accounted for more than $5 billion of the haul. The top 200 bonus recipients at JP Morgan Chase received $1.12 billion. . . . At Goldman Sachs, 200 people collectively received nearly $1 billion.

What about the companies subject to restrictions? 

Citigroup is wrestling with the payment of $100 million to a trader in the energy area, the matter apparently in the hands of the Pay Czar.  Other companies have found ways around the restrictions.  We noted that when Congress opted to limit bonuses as a means of restricting executive compensation, one way to sidestep the restraints was to simply raise salary.  That seems to be exactly what Morgan Stanley did.  It is raising salaries of top executives.  As the WSJ reported:

• Under the changes announced after the close of regular trading Friday, the base salary of Morgan Stanley Co-Presidents James Gorman and Walid Chammah will increase by one-third to $800,000 a year, according to a securities filing. Chief Financial Officer Colm Kelleher, Chief Legal Officer Gary Lynch and Chief Administrative Officer Thomas Nides will get a base salary of $750,000 each.

• All five executives previously had a base salary between $300,000 and $600,000. In fiscal 2008, Messrs. Chammah, Kelleher, Lynch and Nides had base salaries ranging from $300,000 to $322,903, according to a proxy filing by Morgan Stanley. Mr. Gorman's base salary wasn't disclosed in the filing. Morgan Stanley Chairman and Chief Executive John Mack's salary will remain unchanged at $800,000.

Guaranteed bonuses, a practice largely eliminated in the crisis and viewed by some as abusive, have resurfaced. 

In short, the crisis isn't really over and pay practices are returning to normal.  It remains to be seen whether there will be a permanent fix.  Barney Frank is trying, although doubts exist about the merits of the approach.  Whether these modest efforts will become law is a completely open question. 

Full post as published by The Race to the Bottom on August 15, 2009 (boomark / email).