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The Failure of Bank CEO Compensation

Adam Rust's picture

Posted September 18, 2012

There is no way to get around the truth: many shareholders are getting ripped off by the compensation committees of Fortune 500 companies.

CEOs defend the pay packages that they have been awarded by compensation committees by arguing

that their pay is driven by performance.

A little about myself: my name is Adam. I am a shareholder "victim."  First, there was denial. Then there was anger. But I have come to terms with 2008. Now I have reached acceptance. To Ken Lewis and John Roth, I say that you can't bother me now. To G. Kennedy Thompson and Richard Fuld: I laugh at you because I got out in 2007. Too bad you didn't.

Let me offer a chance to look back on how well CEO pay correlated to the creation of long-term shareholder value in the financial sector. I have collected some data on the pay packages of bank CEOs in 2007. I have also managed to look back to see the share price of twenty-two companies on Jan. 1, 2007 and on Jan. 1, 2008. The difference between the first and second dates should have been a basis for judging the performance of the work of those CEOs. Then I collected share prices from today. This is another valuable indicator because it reveals something about how well those leaders were able to create lasting value.

The first takeaway: eight of those companies are no longer worth the price of even one gallon of corporate jet fuel.

Overall, pay was negatively correlated to performance. For additional dollar in 2007 CEO pay, the price of the shares in that company fell by 8 percent.

The board at Merrill Lynch wins the prize for paying more than anyone else in 2007. John Thain earned only $57,700 in salary from Merrill Lynch, but he pulled in $15 million in incentives, $30 million in options (Black-Scholes) and another $33 million in restricted stock grants.  Never mind that Merrill Lynch managed to lose an average of $19.7 billion between July 2007 and 2008.

The same outcome is the case with Lehman Brothers, which awarded its CEO $40 million.

Perhaps the most egregious example of compensation that enriched a CEO in spite of his or her record in creating shareholder value is in the case of Angelo Mozilo at Countrywide.  Angelo Mozilo received $22.1 million from Countrywide in 2007. During a twelve-month period ending in August 2007, he sold $121.5 million in shares. In 2006, his total pay package was $68.5 million.

Here is what Angelo Mozilo wrote in a  series of August 2005 emails entitled "Bank Assets" to Carlos Garcia, an executive in the thrift's Countrywide Financial unit:

"You should never put a non-owner occupied pay option ARM on the balance sheet...The simple reason is that when the loan resets in five years there will be an enormous payment shock and if the borrower is not sufficiently sophisticated to truly understand this consequence then the bank will be dealing with foreclosure in potentially a deflated real estate market."

"On Sunday I met with a mortgage broker from a town near Troy, Michigan who told me that he does all of his business with Countrywide. First I was pleased with the news until he told me why. He said that the area he serves is severely economically depressed and that the only way he can qualify his borrowers is the via [sic] the pay option ARM. I have heard this story many times over from mortgage brokers who utilize the pay option for very marginal borrowers for the sole purpose of creating volumes and commissions. We simply cannot and will not allow our Company to be victimized by this pervasive behavior and since we can't control the behavior of others it is essential that we control our own actions."