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Do Banks Pay For Performance?

While industry analysts believe there’s an urgent need to align CEO pay with performance, apparently many companies are still dragging their feet on the issue. A study by the Presidio Pay Advisors revealed that U.S banks which participated in the Treasury’s bailout program have not tied executive pay with performance since the financial crisis began in 2007.

While industry analysts believe there’s an urgent need to align CEO pay with performance, apparently many companies are still dragging their feet on the issue. A study by the Presidio Pay Advisors revealed that U.S banks which participated in the Treasury’s bailout program have not tied executive pay with performance since the financial crisis began in 2007.

The study by the San Francisco based compensation consultation firm revealed that irrespective of the poor performance, executive pay at many banks recorded a steady increase.  CEO and CFO compensation at banks receiving Troubled Asset Relief Program (TARP) investments did not change in statistically meaningful ways despite the banks’ poor financial performance,” the Presidio study said.

The study analyzed the relationship between changes in executive compensation and measures of financial performance among 115 banks holding total assets of $11.9 trillion, with each receiving a minimum of $50 million in TARP investments.

According to Presidio more than 90 percent of the reviewed banks generated negative shareholder returns since 2006.  Surprisingly, despite the negative returns nearly three in ten (29 percent) of the CEOs who held office from 2006 through the end of last year received increases in 2008 total cash compensation (base salary plus annual bonus); which ranged from one to 108 percent over 2006 levels.

Almost one-third (30 percent) of these CEOs and 37 percent of CFO’s studied received increases in 2008 total direct compensation of four to 174 percent and two to 76 percent over 2006 levels. Stock options granted to CEOs rose 71 percent to 11.1 million and those given to CFOs jumped 59 percent to 3.5 million over that stretch, Presidio said.

“As performance deteriorated in 2007 and 2008, many Compensation Committees reset performance targets, paid discretionary bonuses, excluded unusual or one-time charges from bonus calculations, or increased long-term incentive grants for retention purposes.  These actions are inconsistent with paying for performance,” said Dave Bisson, a senior consultant at Presidio Pay Advisors in a media release.

CEOs of banks such as South Financial Group, Citi, Associate Ban-Corp, Susquehanna Bancshares and First Horizon National have recorded a pay hike ranging between 1 percent and 70 percent over the 2006 levels, while the companies reported notable losses in revenues.

Banking CEOs Compensation & Performance Insight 2006-2008
RankCompanyCEOVariance (2006 & 2008 Revenue %)Variance (2006 & 2008 compensation %)

1

South Financial Group

Mack I. Whittle Jr.

-584.58

70.55

2

First Horizon National

Gerald L. Baker

-141.47

7.67

3

City National Corporation

Russell Goldsmith

-55.03

0.48

4

Associated Banc-Corp

Paul S. Beideman

-46.77

34.85

5

Susquehanna Bancshares

William J. Reuter

-1.196

22.31

Source: SEC Filings & Annual Reports
Note: Rankings are based on 2006, 2008 revenue variance percentage. The above listed banks are randomly picked for analysis. Negative variance denotes loss of revenue
The list depicts only such banks which have received at least $50 million under TARP bailout.
Figures have been rounded off to the nearest zero

Interestingly, a report from the NY Attorney General Andrew Cuomo also revealed how banks mismanaged public money and doled out billions of dollars in bonus to its employees. In a report, Cuomo disclosed nine Wall Street banks doled out a combined $33 billion in 2008 bonuses to employees despite losing billions of dollars and receiving an unprecedented government bailout.

His nine-month investigation found that even though banks tout the importance of tying pay to performance, compensation has become “unmoored from the banks’ financial performance.”  

Citigroup and Merrill Lynch, received combined government bailouts of $55 billion and lost $54 billion last year, but still paid out $9 billion in 2008 bonuses, a report published in iStockanalyst, an Oregon based investment advisory firm said.

Meanwhile, Goldman Sachs, Morgan Stanley and JPMorgan Chase shelled out more in 2008 bonuses than they earned, the Cuomo investigation revealed.

However, a cursory analysis by CE Online revealed that Fortune 1000 banks which received at least $1 billion in bailout money are increasingly aligning executive pay with the company performance.

The CE analysis found that out of the 13 Fortune 1000 banks about 46 percent of them have recorded a reduction in CEO pay in line with the company performance, while 15 percent of the banks reported increase in the pay despite losses in revenues.

Banking CEO Compensation Insight 2006-2008
RankCompanyCEO 2008TARP Amount Committed $ BillVariance (2006 & 2008 Revenue %)Variance (2006 & 2008 compensation %)

1

Citigroup

Vikram  Pandit

50

-177.80

32.07

2

Zions Bancorp

Stephen D Steinour

1.4

33.58

35.64

3

SunTrust

James Wells

4.9

-166.08

6.55

4

Regions Financial

Dowd Ritter

3.5

-513.55

-329.26

5

Wells Fargo

John Stumpf

25

-219.47

-240.64

6

Bank of America

Kenneth Lewis

52.5

-427.27

-182.94

7

CIT Group

Jeffery Peek

2.3

27.95

-158.18

8

Fifth Third Bancorp

Kevin T Kabat

3.4

-277.86

-104.70

9

Key Corp

Henry Meyer

2.5

-239.15

-78.87

10

Marshall & Ilsley

Mark Furlong

1.7

21.13

-56.10

11

Huntington Bancshares

Harris Simmons

1.4

16.47

-53.69

12

PNC Financial Services

James E Rohr

7.6

-194.22

-51.21

13

Comerica

Ralph Babb Jr

2.3

22.07

-44.78

Source: SEC Filings & Annual Reports
Note:

Rankings are based on 2006, 2008 CEO compensation variance percentage.
Negative variance denotes reduced revenues & compensations
The list depicts only such banks which received at least $1 billion under TARP program
Figures have been rounded off to the nearest zero

About fayazuddin a. shirazi