Election Fraud and CEO Pay

News in recent days reveals that 2010 Chief Executive Officer pay jumped more than 36% from the previous two years (determined by averaging CEO pay at the Standard & Poor 500 companies). While unemployment continues to scourge Main Street, Wall Street executives, with what can only be described as modest performance, found their pay increased by 36%. CNN reports: "Paul Hodgson, senior research associate at GMI, said the sharp rise in pay was out of line with the relatively modest improvement that companies typically achieved in profits or share price during 2010. The most lucrative sector for CEO pay was health care, which included three of the nine top-paid executives, including the two most lucrative packages . . . ."

Next, in an under-reported story, a Republican campaign manager in Maryland was convicted of election fraud last week. As discussed by Professor Sherrilyn Ifill at The Root: "Those who are still confused about why Republicans spend so much energy making it harder for people to vote should pay some attention to a case that concluded this week in a courtroom in Baltimore. There, the campaign manager for 2010 Republican gubernatorial candidate, and former Maryland governor, Robert Ehrlich was tried and found guilty of election based on an attempt to suppress the African-American vote by authorizing the use of misleading robocalls."

Pay Czar Strikes Back at Excessive Executive Compensation

In June 2009, President Obama appointed Kenneth Feinberg, the Pay Czar, as he is often referred to in the media, after public anger exploded over high executive compensation at companies that received Troubled Asset Relief Program (TARP) bailout funds. Feinberg is well versed in areas of human resources valuation, and consensus building without the need for litigation. Feinberg previously oversaw the distribution of funds for victims of the attacks of Sept. 11, 2001. In August, 2009, revision to the TARP legislation attached executive compensation restrictions to the pay for the top 25 earners of any company that received TARP funds, and compensation totaled more than $500,000 from October 2008 through February 2009, including 2008 end-of-the-year bonus payments. The revisions to the TARP legislation also gave Feinberg “wide authority to attempt to recoup money” paid to employees at companies that received TARP funds.

A few weeks ago in March, Feinberg completed his review of executive compensation at 419 companies that had received bailout funds. Feinberg in his discretion determined whether any payments were contrary to public interest and may request that individual executives return the excess money received. Unfortunately the TARP legislation, despite its “wide authority to attempt to recoup money“ does not specifically provide Feinberg with any enforcement authority, regarding the recoupment of excess executive compensation. As such, Feinberg cannot force executives to return the money. However, this lack of enforcement authority does not seem to concern Feinberg. He believes that the he can be very persuasive. An interview with Feinberg discussing his authority to recoup funds from executives is available here. Executives at several companies fall into this category including JP Morgan Chase, Goldman Sachs, AIG, Citigroup, General Motors, and GMAC. Bank of America repaid $45 billion to the U.S. Treasury, two days before Feinberg’s report was released, and effectively removed itself from Feinberg’s scrutiny.

Feinberg's executive compensation restrictions and recoupment power is regarded by some as a bold expansion of his “review of pay powers,” and may send a signal to Wall Street that it cannot return to big bonus payments without intense public and governmental scrutiny, and ire. Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University, believes that Feinberg's look-back plans are necessary. Hurley stated that “[I]f the notion was to see who had their hand in the cookie jar when the crisis was unfolding, then that should be revealed."


Recently, the New York State Comptroller released a report in February showing that bonuses on Wall Street rose 17 percent in 2009 to $20.3 billion. This figure is a little incredulous to me given that the vast majority of Americans are struggling to save their jobs, homes, retirements, and feed their families. Wall Street's disconnect with human suffering or basic moral compass as to what is appropriate, reminds me of the Army-McCarthy Hearing which was the first federal hearing broadcasted live to the American people in February 1950. Senator Joseph R. McCarthy was chairman of the Senate Committee on Government Operations and its Subcommittee on Investigations. McCarthy demanded preferential treatment for his aide who had been drafted, and was scheduled to be sent abroad. When the U.S. Army refused to extend any preferential treatment on Senator McCarthy’s behalf by deciding not to intercede in the draft process, Senator McCarthy immediately commenced an investigation of the U.S. Army. McCarthy was summoned to appear before Congress to answer questions regarding his motive for commencing an investigation of the U.S. Army. The verbal inter-change between McCarthy and Special Counsel for the U.S. Army, Joseph N. Welch, became very heated. At one point Welch, exasperated with McCarthy’s sarcasm and blatant lack of respect for the U.S. Army, Congress, and anyone who dared to question his actions, lost his usual reserved demeanor, stood up and yelled at McCarthy-- “You have done enough. Have you no sense of decency sir, at long last? Have you left no sense of decency?” Americans were outraged by McCarthy’s lack of respect, decency, and his sense of entitlement to preferential treatment. Americans wasted no time in expressing their outrage to their elected officials. Within a few months of the hearing, the Senate voted to condemn McCarthy.

Public exposure has proven to be a powerful tool, as evidenced by the condemnation of Senator McCarthy, and the slow but largely successful repayment of bonuses that were previously paid to AIG employees. However, some experts are doubtful, “Wall Street might be immune to shame,” said Russell Roberts, an economics professor at George Mason University, and research fellow at Stanford University's Hoover Institution. Roberts stated that, “[I]f the goal is to shame executives, there is not much shame on Wall Street, and I doubt it would have much effect if that is [Feinberg’s] only lever." I would not underestimate Feinberg. He has proven to be very very persuasive, and Americans are outraged. It may prove to be a combustible combination.

Lydie Nadia Cabrera Pierre-Louis

The Federal Pay Czar Moves to Cap Executive Salaries At TARP Firms

On Friday, Kenneth Feinberg, the White House’s “pay czar” unveiled new pay restrictions that are aimed to limit the pay for top employees among the largest TARP bailout recipients. Thus far, this Feinberg’s actions on Friday represent the largest effort to cap or limit the pay of top employees. Feinberg’s ruling will impact 75 out of the top 100 highest-paid employees at Citigroup, AIG, General Motors, and GMAC.

Feinberg’s ruling prevents employees at the largest TARP recipient companies from receiving base salaries of more than $500,000. Of this $500,000 base salary cap, at least ½ of that amount must come in the form company stock, and the remaining ½ in cash. In a press conference yesterday, Feinberg noted: “We want to minimize these runaway perks and other compensation practices.” Feinberg’s ruling takes effect on Friday and is not retroactive.

This is the second time since October that Feinberg has weighed in on executive compensation. In October, Feinberg cut the compensation packages for the top 25 executive at the seven companies that received federal bailout money more than once. In October, Feinberg’s shrunk salaries by 90% and transferred bonus payments into a performance-based pool of long-term stock options. Feinberg’s October pay pronouncements affected 136 executives. This time around, 450 executives will likely be affected by Feinberg’s plan.

Companies opposed to Feinberg’s plan have presented two (2) main arguments in opposition. First, companies affected by Feinberg’s plan have argued that government imposed pay curbs have prompted the best and brightest to flee their ranks. Second, they have argued that caps would hinder the overall performance of their companies’, thereby making it harder to pay back their TARP funds. Feinberg indicated that he carefully evaluated these concerns. Indeed, Feinberg has granted an exemption for nearly a dozen individuals “deemed to be very essential” to be paid more than $500,000. Most of these “essentials” will earn between $500,000 and $950,000 annually. One individual will make over $1 million. Feinberg indicated that his office would have the final say on the size of a company’s bonus pool and how it is allocated.

TARP bailout recipients have been scratching their heads to figure out how to quickly repay their TARP funds. This week Bank of America rushed to payback $45 billion in TARP funds to escape Feinberg’s salary death-grip. This week we were informed that Citigroup is exploring a number of options to raise capital to pay-back billions of dollars in TARP funds.

Are we seeing a larger movement to limit or cap executive compensation? Perhaps. However, it is still too early to tell. On Thursday, Goldman Sachs announced that the 30 executives who comprise the company’s management committee will not receive cash bonuses this year. Also, Goldman Sachs announced that shareholders would get an advisory vote on pay packages for executives. This is an indication of some positive movement. Undoubtedly, more traction and movement is needed to tackle the difficult problem of executive compensation. Certainly, the issue is on the radar screen for many.

whither executive compensation?

Bank Bonus Tab: $33 Billion
Nine Lenders That Got U.S. Aid Paid at Least $1 Million Each to 5,000 Employees

Splashed across the the Wall Street Journal on Friday (7.31.09) was the news that nearly $33 billion in executive and employee performance bonuses were paid out in 2008 by nine Wall Street banks that had accepted government bailout money through the TARP program. Despite near collapse and a necessary rescue from the government, nine investment banks still paid the executives and employees that presided over the catastrophic declines $32.6 billion in bonuses.

This news comes on the heels of reports on Thursday of last week (7.23.09) that Goldman Sachs, Morgan Stanley and JPMorgan Chase had set aside dozens of billions of dollars to pay their executives and other employees for 2009 performance. On the same day that Goldman Sachs announced that it would likely (if the pace of set asides continues this year) pay its executives an average of $775,000 in 2009, more than double that of 2008 and more than bonuses paid in 2007, a report on unemployment indicated that jobless claims increased more than expected, and the Federal Reserve expects the unemployment rate to top 10 percent by year-end.

As unemployment increases on Main Street, over on Wall Street, the song seems to remain the same. Executives and employees will receive significant performance bonuses in 2009 despite receiving government bailout funds and in many instances presiding over a near collapse of the banking industry. More shocking than the plans to compensate for 2009 is the New York Attorney General Andrew Cuomo report that $32.6 billion in bonuses were paid out in the wretched economic performance year of 2008. What gives?

Common sense seems to dictate that if performance is dismal, then bonuses should match that performance (meaning, very little should be paid in bonuses). Remember, that bonuses are paid to executives and employees in addition to salary. In the Sports context, in particular the National Football League, performance bonuses are negotiated in advance between an athlete and a professional club, and those bonuses are simply not paid if the negotiated performance is not met. Many bonuses in professional sports are team based, indicating that if a team reaches a certain level of success, then bonuses will be paid to a particular player. The NFL collective bargaining agreement even breaks bonuses down for purposes of the salary cap, into "likely to be earned" bonuses and "not likely to be earned" and those bonuses count differently toward a team's overall budget and cap number. In the NFL, bonuses are paid for successful performance and are in excess to an athlete's base salary.

Apparently on Wall Street, a much different conceptualization attaches to performance bonuses than in the world of professional sports. Nine investment banks received bailout funds rather than face collapse, and then turned around in that environment of "failure," and paid bonuses to its executives and employees that presided over that dismal performance, above and beyond salary, to the tune of $33 billion. In some ways, one could interpret this payout as taxpayers (through the TARP bailout) subsidizing the performance bonuses that were paid to executives that engaged in breathtaking risk and lost badly. As would be expected, Congress is inflamed. Edolphus Towns, the chairperson of the U.S. House of Representatives investigative panel called the payouts "shocking and appalling" and announced hearings.

Those that defend paying significant bonuses in the face of failed performance typically claim the following: (1) Wall Street must pay to keep talent at their firms; (2) that only a small group of executives or employees are typically responsible for losses and it is unfair to punish employees or executives in other areas of the business.

AG Cuomo stated: "The banks say they pay for performance. . . . Yet in 2008 there was no performance and they still continued to pay out huge sums of money."

I get the argument that individuals that were not responsible for the damning losses and egregious decision making should not be held responsible or "punished" for the "sins" of the few. Still, that argument fails to appreciate the broken executive compensation system in place on Wall Street. Over and over again, Wall Street executives have shown that they exist in a much different space than the rest of America. From the AIG "retreat" to a posh resort moments after receiving bailout funds to the $33 billion in bonus payouts for 2008 performance, those that run Wall Street seem incapable of recognizing Main Street and the human suffering that continues unabated for many based almost wholly on reckless and irresponsible leadership by Wall Street executives.

What to do about executive compensation?