Sunday, August 16, 2009

Whether generous bump of executive salaries violate any rules?

The scrutinies of executive pay in most of the countries are proving that due to revival of global economy salaries of executives are minutely reviewed. There was lot of salary cut in the last two years but now the revival has started. But the question is that up to what extent the salaries can be changed.The Obama administration's new pay czar Kenneth Feinberg has to be on the lookout for in the coming months as he reviews the compensation plans of seven companies that have received "exceptional assistance" from the government. Feinberg received the pay information over the last week, and his findings due in October are expected to be a blueprint for pay programs throughout the financial industry in USA.
Whether generous bump violate any rules? The matter came up in light in the beginning of this month when the San Francisco bank raised CEO John Stumpf's salary to $5.6 million, through a mix of cash and stock. That's more than six times his salary last year. Wells Fargo is bound by under the Treasury Department's Troubled Asset Relief Program, which doled out $25 billion to the bank last fall to shore up its capital base. That's because the new pay scheme doesn't include a bonus, just a guaranteed higher salary. Wells Fargo isn't one of the companies on Feinberg's to-do list, but it well illustrates the struggle to determine what is "fair" pay in today's reviving corporate world.
Soaring bonus payouts to financial service company executives tied to short-term results clearly played a role in the financial crisis. In recent years, 80 percent to 90 percent of executive compensation was driven solely by annual performance. That led to excessive risk-taking, which ultimately backfired and resulted in losses so large that the government had to step in with multiple rescue plans.Now the US govt. is thinking that how to shift the compensation paradigm accordingly on July 31 House voted to prohibit pay and bonus packages that encourage bankers and traders to take risks so big they could bring down the entire economy.As a review pay plan is already submitted by American International Group, Citigroup, Bank of America, General Motors, Chrysler and the financing arms of the two automakers.
The goal of the US govt. is to force companies to come up with compensation programs that better align shareholders' and executives' interests. The recent compensation changes at Wells Fargo shows how deciding what's appropriate can get murky. Its CEO Stumpf will get $900,000 in cash as part of his 2009 salary, the same as last year. But he will also get another $4.7 million in stock that has been labeled as being part of his salary. Stumpf and three other executives who also got large salary increases can't sell these new shares until the company repays the government's bailout money. Stumpf will also receive 108,528 in restricted share rights this year, valued at $2.8 million when they were granted earlier this month. Those shares will begin to vest in 2011.
Companies are using stock to increase their leader’s salaries to keep the pay closely tied to the success of the shareholder. But another way of looking at this is that Wells Fargo's top brass are getting guaranteed pay not necessarily tied to financial results. At the end of every two-week payroll period, Stumpf will get a portion of that $4.7 million in stock, with the amount of shares determined by where the stock is trading then. If the stock goes down, he gets more shares; if it goes up, he gets fewer.
That means a short-term drop in Wells Fargo stock could actually benefit the bank's executives. They also benefit from the fact that the stock now trades around $28 each, about a third less than what it was last fall. Whether is it a good that only future will tell us?
The financial companies that took government money don't have many options in how they can structure their pay programs at a time when there is talk of a potential brain drain of top talent. The amount of compensation change most likely meaning salaries will grow while bonuses could shrink. Only the coming months will decide the future of executive pay, especially for financial firms. The Obama administration has proposed giving shareholders at all public companies a nonbinding vote on compensation packages. In addition, it wants to diminish management's influence on pay decisions by banning members of board compensation committees from having financial relationships with the company and its executives.