Administration seeks to change pay incentives at major firms
When the Obama administration imposed restrictions on executive pay last year at some of the largest companies the government had bailed out, officials said they were aiming to set a new standard for compensation across corporate America that would discourage risky business practices.
But as firms begin to disclose last year's bonuses ahead of annual shareholder meetings, it is becoming clear that companies across a wide range of industries are paying executives in ways that officials worry will not discourage the kind of excessive short-term risk-taking that led to the financial crisis.
The Treasury Department said it is not looking to limit the total pay executives receive. Kenneth R. Feinberg, President Obama's special master for compensation, wants to change pay incentives, giving executives a greater stake in the long-term performance of their firms. That would mean, for example, smaller up-front cash salaries and fewer perks, more compensation in the form of company stock and a longer wait to receive it.
"I see no indication whatsoever that the business community is paying any attention to the administration's suggestions," said Nell Minow, co-founder of the Corporate Library, an independent corporate governance research firm. "On the contrary, I think pay is worse this year than it's ever been."
American Express, for example, shifted much of chief executive Kenneth I. Chenault's compensation to cash. Even though his overall pay for 2009 dropped from the year before, Chenault received $11 million, or two-thirds of it, in cash. By contrast, more than two-thirds of his compensation in 2008 was in stock and stock options. His cash payout was $7 million.
At Wells Fargo, the company more than tripled the cash salary this year of chief executive John Stumpf, and Corning, a glass and ceramics maker, restructured its long-term incentive pay program -- previously centered on stocks and stock options -- to focus more heavily on cash.
Some firms are also rewarding executives with more perks. In the most recent fiscal year, more U.S. chief executives received club memberships than in the previous year, and companies paid more to cover their use of corporate jets for personal travel, according to studies released last week by the Corporate Library.
Congress and the Treasury Department also required last year that shareholders at the hundreds of firms receiving taxpayer bailouts be able to take an annual advisory vote on how executives are compensated. "Say on pay" is also included in the financial oversight legislation passed by the House last year and in the bill now awaiting action by the full Senate.
But beyond those firms that received bailouts, a multitude of companies -- McDonald's, Johnson & Johnson, General Electric and IBM, to name a few -- are fighting shareholder proposals that would give stock owners a say on executive pay packages.
Waddell & Reed financial advisers, for one, has mailed letters to investors urging them to oppose the resolution. A company spokesman did not return phone calls seeking comment, but the firm said in securities filings that allowing shareholders to vote on pay packages could put it at a competitive disadvantage and erode investor value.
It was almost a year ago that the administration set its sights on stamping out compensation practices that encouraged excessive risk-taking for short-term results. It named Feinberg, who restructured compensation practices at seven firms receiving exceptional federal assistance and set the amount paid to top executives at those companies. The administration also issued detailed rules for hundreds of other firms receiving taxpayer help and invited scholars, shareholders and corporate governance experts to offer their input. Treasury Secretary Timothy F. Geithner said at the time that the process of establishing better pay practices had begun.
But the initial results show that companies have been slow to follow the administration's lead, investors and governance experts say.
Corning said various factors went into its decision to move toward cash in its incentive program. The awards, previously paid solely in stock options and in restricted stocks that vest over several years, will now be half cash.
John MacMahon, a senior vice president in charge of compensation matters, said Corning in part wanted to reduce the impact of short-term swings in stock price on compensation. He said the firm also wanted to lessen the accounting expenses associated with options for stock that had dropped in price and were of little value to executives, and wanted to lower the amount of stock awards, which dilute the value of other shares.
"We focused on what it is Corning needs to do to improve performance," he said.
American Express said in its most recent proxy statement that it reviewed its compensation practices last year. And while nearly half of Chenault's cash pay in 2009 was in the form of a short-term discretionary bonus, the company said that this year it will reduce the total amount of cash that executives can earn through the annual bonus and a longer-term pay program.
Executive pay practices at Wells Fargo have received some of the sharpest criticism, including from the American Federation of State, County and Municipal Employees, which owns shares in the bank through the union's pension fund.
Wells Fargo raised Stumpf's salary last year from $880,000 to $5.6 million, much of it paid in stock, after the company received a federal bailout. His total compensation package was $21 million, the highest among banks that took government money.
Then, after returning the bailout money to the government late last year, the bank scaled back his total salary for this year to $2.8 million but is paying it all in cash.
Melissa Murray, a bank spokeswoman, said the pay was justified because Wells Fargo had record profits in 2009. She said Stumpf's overall compensation last year included company shares, which reflect long-term performance and were awarded as part of an effort to retain senior executives.
Feinberg says "small, early signs" indicate that at least some companies are getting the message. As an example, he pointed to Goldman Sachs chief executive Lloyd Blankfein, who took all of his bonus in restricted stock that cannot be sold for five years.
"I think Wall Street and other companies would be well advised to follow the prescriptions I've laid out," Feinberg said. But, he added, "true executive compensation reform" requires other steps, including far-reaching changes in how corporations are governed and how financial firms are regulated.