Ethical Houston

Over the past year we’ve all been inundated with articles about large executive compensation packages and in particular about compensation packages to executives in companies that received bail out money from the government.  And this at a time when those same companies were laying off thousands of lower level employees to cut expenses.  Of the eight banks bailed out, Citigroup, Inc.  seems to be the most beleaguered and along with Goldman Sachs and AIG has received the most criticism for their high executive compensation packages.  One of the major arguments in favor of these high salaries and bonuses is that in order to keep good talent you have to pay high salaries.  Some might say and have said that if these are the best minds to run the business, that American business and in particular banking is in big trouble.  The disparity between the top and lower level Citi employees is huge and the anger among the rank and file is well documented.  A blog run by Indeed, Inc., an executive employment website documents numerous postings about Citigroup’s wage levels.  Here’s just one:

 “A Citigroup recruiter called me for a  SENIOR Accountant position @ Citigroup. I was told that the position maxed out @ $35k. For a SENIOR level position. I would hate to see what they pay their entry level people.”   

 From Zacks investment research           “Citigroup Inc.  may cap cash bonuses for 2009 at below $100,000. The 2009 bonus pool at the company is expected to be similar to the 2008 level, which was low compared to the other years. Citi may pay a large part of the bankers’ and traders’ bonuses in stock that cannot be sold for a number of years.

Citi may pay up to 40% of bonuses in the form of deferred cash and stock and the balance in the form of non-deferred cash and IOUs, which will turn to common stock in April.

Currently, Citi is working out the details of its bonus plan. Recently, New York Attorney General Andrew Cuomo asked Citi and 7 other of the largest banks in the nation that received significant federal aid under the Troubled Asset Relief Program (TARP) to provide information on the amount of 2009 bonus packages and their structure. Cuomo also asked the banks to explain the effect the bonus pools would have had if the banks had not received the TARP funds.

 According to Cuomo, the full disclosure and transparency of the bonus information are essential as recent government actions have given rise to public accountability issues, and TARP banks are struggling with these actions.

Citi received $45 billion in bailout money from the TARP at the height of the credit crisis. Later, around $25 billion of that was converted into common stock, representing nearly 34% of its stake held by taxpayers. The company repaid the remaining $20 billion in bailout money in December 2009, freeing the obligatory pay restrictions on its key executives.

  Citi’s plan to cap cash bonuses is to save the bank from people’s fury over the TARP banks’ 2009 bonus plans. However, the bank says may still find it difficult to keep its top employees.”

 From Reuters      “Regulators, lawmakers, and others are trying to determine how changing compensation packages might reduce the chances of future financial meltdowns. The Federal Deposit Insurance Corp is considering charging lower rates for deposit insurance to banks with pay practices that it deems superior.

According to a July report from New York Attorney General Andrew Cuomo, Citigroup as a whole paid $5.3 billion of bonuses for 2008.

 Officials at rival companies told Reuters that Citigroup employees will essentially receive at least 60 percent of their bonuses in cash or stock that can quickly be sold. That level is high compared to some rivals, which could help the bank retain employees.  But some Citigroup employees groused at the relatively low portion of the bonus that will come in cash.

 Loren Steffy in the February 26 Houston Chronicle reports on executive pay for the General Motors Ceo, Ed Whitacre and past interim CEO Fritz Henderson.  Whitacre’s package includes $1.7million a year plus $7million in stock.  Fritz Henderson who for all practical purposes was fired is being given a $60,000. per month consulting agreement plus an expense account.  He is required to work at least 20 hours a month on the job.  Steffy suggests that Whitacre take the job for $1. per year since he received $158million from AT&T when he retired.  The interest on the $158million is about four times the $1.7million he’s receiving now.  By contrast Ford CEO Alan Mulally agreed to accept a $1. salary if Ford needed a federal bailout.  That was not necessary and Ford has gained market share and is expected to soon be in the black.  Mulally’s salary is slightly more than Whitacre’s at $2 million.  Last year GM received about $50 billion in bailout.  And as a result of that bailout you and I are now Whitacre’s employer. 

The media, the public, government regulators and congress are going through their hand wringing dance asking what should we be doing with all the bad guys.  Much of what has happened in the past few years was a long time in coming.  Questions of whether employment contracts should be honored in companies that are either bankrupt or being kept afloat to keep from going bankrupt are being used as a defense of big severance packages.  Arguments about high paid executives going elsewhere if they aren’t paid huge pay packages seems a bit contrived.  Where will they go?  Hedge funds which have shut down over 200 shops in the last two years?  Or, Europe which hasn’t had the bottom fall out yet?  Probably the best place for many of them to get employment would be with lobbyists who deal with the Washington bureaucrats, regulators and politicians who will probably not make any substantive punitive changes except as it may affect those companies and executives who played the game ethically and by the rules. 

My observation is that most relational issues such as this begin as ethical issues and because a minority acts unethically, new laws and regulations are passed in order to close loopholes or deal with unintended consequences.  But the sad truth is that those that want to circumvent the law will find ways to do so, and in so doing will effect the ability of the rest of us to carry on ethical business dealings.