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Effect of Henry Paulson bailout plan on CEO pay/compensation: a Report

By Amarendra Bhushan for CEOWORLD Magazine Updated:September 25, 2008

Unfortunately, I fear that the working class and lower class people may be affected even more than others due to the lack of reserve resources. If the banks fail, and credit resources literally freeze, small business won’t be able to obtain inventories or meet payrolls, and the lower end of the economic ladder will suffer as well.

I’m not even sure that public assistance checks will be honored at the banks. This is potentially bigger than what most of us have experienced in our lifetime. I hope that this is hyperbole, but fear that it is not. So the question remains under these circumstances, with a taxpayer bailout of financial firms in the hundreds of billions of dollars looming, limiting the compensation of Wall Street executives may seem like a good idea.

Goldman Sachs chief executive Lloyd Blankfein, for instance, took home nearly $54 million in salary, perks, bonuses and other stock awards in 2007. J.P. Morgan Chase chief executive James Dimon collected $30 million in cash, stock and options. And Wachovia chief executive G. Kennedy Thompson received total compensation of about $15.6 million. When the federal government took over mortgage giants Fannie Mae and Freddie Mac, it rescinded $12.5 million in severance pay and bonuses for the firms’ two top executives. That action allowed the gentlemen to walk away with a total of only $9.4 million.

But, U.S. Treasury Secretary Henry Paulson made it clear that a proposed $700 billion proposal to bail out some of the biggest financial firms must be modified to put some limits on the paychecks of executives whose firms use it. “This is a serious problem and I agree, we must find a way to address this in the legislation, but without undermining the effectiveness of this program,” he said, without offering any indication of what type of limits might be acceptable.

Both Democrats and Republicans agree: top executives of the companies failing on Wall Street should be limited in pay. CEOs like Richard Fuld of Lehman Brothers earned a half-billion dollars in five years — about $17,000 an hour. Stanley O’Neal, former CEO of Merrill Lynch, jumped ship with $161 million. The two executives, Daniel Mudd of Fannie Mae and Richard Syron of Freddie Mac, were originally slated to take a severance and retirement package that together was valued at up to $25 million—a disclosure that drew ire from both major parties’ presidential nominees on the campaign trail. Government regulators later rejected the payouts.

While Paulson gave ground on the issue of executive pay, he offered no indication that he was willing to yield to congressional calls that the government receive an equity stake in firms that benefit from the bailout program.

The latest Democratic proposal, which is subject to change, includes the following:

—Treasury must obtain warrants from a company that sells toxic mortgage assets to the government. It also must remit any profits back to the government’s general fund.

—The Treasury must disclose the purchase of troubled assets within 48 hours.

—There will be judicial review of the Treasury’s actions but no court injunctions.

—The Treasury must minimize conflicts of interests among those managing toxic assets.

—There should be help for subprime borrowers to prevent foreclosure on their homes.

—There will be curbs on executive compensation, including a prohibition on golden parachute payments for two years.

Below is a look at the 2007 compensation packages received by the C.E.O.’s of the major banks at the heart of the U.S. financial fiasco.

• Lehman Brothers C.E.O. Richard Fuld made $34 million in 2007. Lehman filed for bankruptcy protection mid-September.

• Goldman Sachs paid C.E.O. Lloyd Blankfein $70 million last year. Co-Chief Operating Officers Gary Cohn and Jon Winkereid took home $72.5 million and $71 million, respectively.

• American International Group C.E.O. Martin Sullivan received $14 million in 2007. He was ousted in June. The insurance titan is due to receive an $85 billion bailout from the federal government.

• Merrill Lynch chief executive John Thain was paid $17 million in salary, bonuses and stock options in 2007. Merrill is being acquired by Bank of America Corp.

• JP Morgan Chase & Co. C.E.O. James Dimon earned $28 million in 2007. Chase acquired troubled investment house Bear Stearns earlier this year.

• Fannie Mae C.E.O. Daniel Mudd received $11.6 million in 2007, while Freddie Mac C.E.O. Richard Syron, brought in $18 million. The federal government will take over the mortgage backers with Herbert Allison to serve as Fannie CEO and David Moffett the new CEO at Freddie.

Many lawmakers have argued that forcing companies to yield some equity in return for the right to offload bad assets onto the government would protect taxpayers by increasing the chances for a profit, or at least a reduced loss, when the assets were eventually resold.

Why should taxpayers, who are dutifully paying off credit-card debt and car loans, shell out seven-figure bonuses to Wall Street financiers whose irresponsible decisions precipitated this mess?

Did you ever think we would long for the days when corporate executive compensation was dependent on corporate performance? Even mega-rich sports stars assume some risk. If they don’t play well, if their team doesn’t win, they don’t get their bonus.

This bailout is sounding more and more like corporate welfare with the welfare kings driving off in their Bentleys that the American taxpayer paid for.