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Spree is over
(chinadaily.com.cn)
Updated: 2008-11-21 15:06 When Henry Paulson came back to his Treasury office on Sep. 25, he brought to his aides some bad news: they had to limit executive salaries, and this could be a major stumbling block for the relief package. Democrats in Congress had insisted on slashing Wall Street executives' compensation and abolishing the golden parachutes. The Secretary argued that it would serve as a disincentive for troubled companies to embrace the bail out. But he had to budge in the end. Luckily, what happened next proved he had made the right decision. On the first Congressional hearing on the financial crisis on Oct. 6, Henry Waxman, Chairman of the House Oversight and Government Reform Committee, posed a tough question of fairness to former Lehman chief Dick Fuld. "Mr. Fuld, your bank is about to go under and suck our economy into the abyss, yet you still made $484.8 million compensation in your 8-year-tenure as CEO. Is this fair to the average American person?" Putting down his glasses, Fuld responded: "No, my compensation is a bit less than $250 million. But I admit it is still a big number." Believe it or not, this is the Wall Street business model: You bet big with someone else's money. If you win, you get a huge bonus. If you lose, you lose someone else's money -- first burdened by the shareholders and debtors and then the government and taxpayers. Many experts agreed that Wall Street had been focusing too much on short-term returns, which distorted incentive schemes and partially contributed to this crisis. The executive pay and compensation package did not reflect the company's risk exposure and long-term performance, and thus entailed a moral hazard. Driven by short-term profits, the executives created and traded complicated financial instruments without understanding the intricate risks. That's why when Paulson's program was unveiled, main street was full of anger: Why did taxpayers have to bail out Wall Street elites and sort out their mess? Is it justifiable to see these well-paid people seeking shelter under the "golden parachute" while leaving the public to take on the huge loss? There were other versions of executive pay limits. A Los Angeles Times article put the executive compensation at 50 times the payment of a company's average staff. Republican Presidential candidate John McCain said at a campaign event that "the senior executives of any firm that is bailed out by Treasury should not be making more than the highest paid government official." The President is the best paid federal official, receiving $400,000 a year. McCain's opponent, Democratic Senator Barack Obama also attacked the CEOs of Fannie Mae and Freddie Mac. He said now that the Treasury had rescued the two mortgage giants with taxpayers' dollars, no CEO would be allowed a windfall. Despite supports from the President, Paulson struggled with the growing pressure. As the former CEO of Goldman Sachs, Paulson himself was among the beneficiaries of this incentive system. He received $38.3 million bonus at the end of 2005, higher than all his counterparts on the Wall Street. So the congressmen blamed the Secretary as a patron of his old friends. This turned out to be the last straw for Paulson. This was the final executive pay limit under the rescue scheme: if the Treasury purchases assets directly from a company, the company shall not offer its executives incentives for excessive exposure. As well, the company is prohibited from making golden parachute payments to a senior executive. If the Treasury purchases over $300 million of mortgage-backed securities via auction from a financial institution, the top 5 managers of the seller will forfeit tax deduction for the part of their compensation in excess of $500,000. Except for voluntary retirement, a 20% consumption tax will be levied upon severance package otherwise. Richard Cooper, an international economics professor of Harvard and the former Chairman of Federal Reserve Bank of Boston, also supported this practice. In his view, after the crisis, the investment banks should remodel corporate governance, and a new executive compensation culture should be the first step. In 2007, the average annual income of CEOs of S&P500 companies almost doubled, in contrast to a 12% growth in their corporate profit. Even Warren Buffett, one of the world's savviest investors, blamed much of today's ills on the American executives, "The salaries of CEOs are disproportionately and ridiculously higher than their institutions' performance." In fact, Lehman did have a system in place, employing stock options and employee ownership program to minimize the adverse effects of profit-biased incentive schemes. Its 24,000 employees held almost 30% of the company's stocks, betting their fortune on the company's future, only to find that they were busted with the fall of Lehman. Their loss, on one estimate, was up to $10 billion. Worse even, many of them left the company without a single penny in compensation. |
