Reporting from Washington and New York - In the most dramatic step yet to curtail huge pay packages for executives on Wall Street and elsewhere, the Obama administration plans to slash the compensation of those running the seven biggest recipients of federal bailout money.
The action, to be announced as early as today, would on average reduce the total compensation of the 25 highest-paid executives at each company 50% from what they received last year, according to people familiar with the decision.
Cash pay -- salaries plus cash bonuses -- would plunge 90% on average. Some of the lost cash pay would be replaced by grants of stock that the executives would have to hold for a set period before selling.
The plan applies to companies that have been given "exceptional" assistance -- tens of billions of dollars each -- under the Treasury's $700-billion Troubled Asset Relief Program. They are American International Group Inc., Citigroup Inc., Bank of America Corp., General Motors Co., Chrysler and the automakers' financing arms, GMAC and Chrysler Financial. Altogether, they have received $240 billion, or more than half, of the TARP money invested so far.
Compensation experts described the pay cuts as unprecedented.
"These numbers are brutal," said Jim Reda, founder of James F. Reda & Associates, a New York firm that advises companies on executive pay. "Reductions such as these haven't been seen even in companies that are bankrupt."
Critics said the action could hurt the firms, in which the government still holds substantial stakes, because executives would have more incentive to leave for employers without pay caps.
"I question how well thought out this is," said Brian Foley, a compensation expert in White Plains, N.Y.
For those who stay, the environment will worsen, predicted Lee Fensterstock, chief executive of New York investment bank Broadpoint Gleacher Securities Inc.
"People are trying to rebuild their companies," he said, "and to the extent that it's uneconomical for them to do so, it creates real frustration."
But longtime opponents of giant executive pay applauded the administration's plan.
"When you're talking about restoring credibility and a sense of fairness, I think there is a tremendous symbolic effect that's legitimate and worthwhile," said Nell Minow, editor at the research firm Corporate Library.
And for Citigroup and Bank of America, "the primary incentive will be to get out of the TARP program," she said. "I think everybody would be very happy if we would have all the money paid back and move on to other things."
Executive compensation, especially on Wall Street, has been a hot political issue since the TARP legislation was enacted at the height of the financial crisis last fall.
Treasury Secretary Timothy F. Geithner this week said it was "deeply offensive" that financial firms that risked failure were again planning to pay massive bonuses to their employees. He made his comments after Goldman Sachs Group Inc. reported it was on track to hand out more than $20 billion in bonuses this year.
Goldman, which has repaid the $10 billion in TARP funds it received, disclosed in April that its chief executive, Lloyd Blankfein, received $43 million in total compensation last year.
Among the CEOs of the biggest TARP beneficiaries, AIG's former chief, Martin J. Sullivan, received $19.4 million in total pay last year, Citigroup's Vikram S. Pandit got $9.2 million, and Bank of America's Kenneth D. Lewis was paid $6 million.
The administration's pay-cut plan was developed by Kenneth Feinberg, the Treasury's "pay czar" for TARP recipients. The original financial rescue legislation included modest limits on executive compensation. The economic stimulus bill enacted in February gave the Treasury secretary greater power to set pay limits and other rules. Geithner appointed Feinberg in June and authorized him to review and approve pay packages at firms receiving exceptional assistance.
Typically, about two-thirds of a top executive's overall compensation is in the form of stock options or shares of stock that can't be cashed in for a certain period of time, said David Schmidt, a senior consultant at James F. Reda & Associates.
The other third is typically paid in cash, divided between a regular salary and an annual bonus tied to performance.
Perks and other benefits, such as the use of a company car or private plane, usually account for a relatively small part of total compensation.
Under the Obama administration's pay-cut plan, the seven companies would be required to get the government's permission before granting any perk worth more than $25,000.
Feinberg, a widely respected attorney who administered a fund to compensate victims and the families of victims of the Sept. 11, 2001, terrorist attacks, has already had an effect on executive pay at the seven firms.
He persuaded Lewis, who is stepping down as Bank of America's CEO at the end of the year, to give up his 2009 salary and bonus. And Citigroup this month decided to sell its commodity trading unit, Phibro, apparently to avoid the troubles of a $100-million compensation for its star trader, Andrew Hall.
Feinberg also has advised AIG to cut back on $198 million in pending retention bonuses, according to a report by the Treasury's TARP inspector general.
|Liveleak on Facebook|