Three Consequences of Controlling Bank Pay
As part of the ongoing monitoring of financial institutions who have received taxpayer dollars to survive over the past several months, President Obama’s “Pay Czar,” Kenneth Feinberg, has released his initial rulings for executive pay at bailed out firms. President Obama spoke in favor of Feinberg’s decisions, saying that it, “does offend our values when executives of big financial firms — firms that are struggling — pay themselves huge bonuses even as they continue to rely on taxpayer assistance to stay afloat.”
Seven companies submitted their pay plans to Feinberg, all of them either banks or automakers. Each of the seven companies released their estimated compensation plans for their top 100 earners and Feinberg found that most plans were, “inconsistent with the public interest.” Feinberg’s findings will have several consequences, both for executives at banks that received TARP money and for Wall Street as a whole.
- Compensation Reduced This Year: The biggest consequence of the Pay Czar’s decision is that a lot of bank executives and highly compensated employees will be seeing smaller paychecks than they expected this year. Feinberg dictated that each bailout recipient reduce its total compensation for their highest-earning 25 employees by an average of 50%. As a result, many executives will see their compensation for 2009 cut by upwards of 90%. Ken Lewis, the outgoing CEO of Bank Of America, announced that he will not receive any compensation for 2009 at the urging of Feinberg. On top of this decision, the Fed proposed a review of the compensation plans for the 28 biggest banks in the US, expanding the reach of government influence in executive compensation. Feinberg has the authority to regulate compensation for any employee making more than $500,000 at the institutions under his review.
- TARP Funds Repaid: Now that banks have seen that lawmakers and regulators are serious about the financial rewards being paid by institutions in financial trouble, many will work hard to repay the money that they’ve borrowed from taxpayers. Several executives have already commented that they wouldn’t have taken the money if they knew this level of scrutiny was coming. In the coming months, we are likely to see many TARP loans repaid as companies work to distance themselves from the intense government oversight.
- Redistribution of Talent: A game of musical chairs is being played among the biggest players in the banking industry with several of the most talented and highly-compensated individuals jumping ship and moving to firms that have already repaid TARP money. Firms like JP Morgan Chase and Goldman Sachs, who repaid the taxpayer money that they borrowed several months ago, now have a strong recruiting pitch for talented executives from other Wall Street firms that are still under the government’s watchful eye. Some of the biggest banks that have not yet repaid TARP funds claim that they have lost dozens of talented individuals to competing firms.
If you enjoyed this post, make sure you subscribe to my RSS feed!
Related Posts
