Bank of America's Ken Lewis takes pay cut, but no one follows
Although CEO Ken Lewis agrees to a $0 pay package, don't expect a wholesale revolution in executive compensation on Wall Street.
That doesn't mean, though, that a wholesale revolution in Wall Street pay is under way.
Not in a hurry, at least.
Mr. Lewis agreed to the $0 pay package based on a recommendation by Kenneth Feinberg, President Obama's "pay czar" for bailed-out firms. In coming days, Americans will learn more about whether Mr. Feinberg will ratchet down pay levels at some other big companies. But his official powers are limited to seven firms that received special bailouts from the federal government: Bank of America, AIG, Citigroup, General Motors, Chrysler, GMAC Financial Services, and Chrysler Financial.
Beyond that, some signs suggest that it's back to business as usual when it comes to pay.
This week Goldman Sachs, the richest Wall Street firm, said its compensation totaled $5.4 billion in the third quarter. That works out to about $170,000 per employee, on average, for those three months. According to The Wall Street Journal, major US banks and securities firms are on course to pay a record $140 billion this year in compensation.
This is not sitting well with some investors and voters.
"How is it possible that the year after billions of taxpayers' dollars helped companies like Goldman Sachs return to financial health, this company shows absolutely no restraint?" Laura Berry, executive director of the Interfaith Center on Corporate Responsibility, said in a statement this week. "As prudent investors, we have a responsibility here to act as the conscience of Wall Street, especially when it fails to do so on its own."
Whether Americans board a bus for Chicago or not, many don’t like the trend in executive pay. In a March poll, taken before some firms including Goldman Sachs had repaid federal money designed to support them, 81 percent described themselves as "angry" over bonuses paid at bailed-out firms. A nearly equal number said they were angry "about the overall levels of compensation paid to top corporate executives."
The issue goes beyond questions of fairness, because the health of the economy is also at stake. Executive pay in recent years has taken up a larger share of corporate income, which could otherwise be used for new business investment. According to many economists, poorly designed incentives encouraged high-risk investment contracts that helped cause last year’s financial crisis.
If the momentum is back toward rich pay packages for bankers, that may be tempered over time by other forces:
• President Obama and many in Congress support legislation giving shareholders the right to an annual "say on pay" vote, advising firms on their compensation packages for executives.
• Many investor advocacy groups also support "say on pay," as well as provisions that would make corporate boards more accountable to shareholders.
• The Federal Reserve and Obama administration are pushing for a new regulatory regime for the financial industry, in which bank regulators would review pay practices for their impact on risk taking.
Changing those incentives is much more easily proposed than done, however. And such changes might mean different pay packages, not lower ones.
The Obama team is trying to keep pressure on for regulatory reform, and one way was a speech by White House economic adviser Lawrence Summers on Friday. The crisis and resulting bailouts make reform necessary amid a changing “social compact between the financial sector and the broader economy,” Mr. Summers said.
Bank of America announced Lewis's pay cut Thursday. His salary had been set at $1.5 million for the year, and he'll reimburse the bank for what he's been paid so far. The news came after Lewis had already announced plans to step down after a tumultuous year including an investigation of the bank's merger with Merrill Lynch. On Friday, the bank announced a $1 billion loss for the third quarter.
As Lewis departs, he'll still take with him a package of pension and long-term compensation over which Feinberg had no say.
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