NY AG's bank bonus report: Banks have no clear reason to the way they compensate and reward employees.

By Biloxi

NY AG Cuomo releases bank bonus report:

REPORT WAS PREVIOUSLY TRANSMITTED TO HOUSE OVERSIGHT AND GOVERNMENT REFORM COMMITTEE CHAIRMAN EDOLPHUS TOWNS (D-NY)

Some observations from Cuomo's report. P. 2:

As part of this review we have also been examining the compensation structures employed by various banks and firms. Accordingly, over the past nine months this Office has been conducting an investigation into compensation practices in the American banking system. Wehave reviewed historic and current data on numerous banks' compensation and bonus plans. We have taken testimony from participants in all aspects of,the process, including bank executives who set and administer the compensation process, members of boards of directors who review company salary and bonus structures, compensation consultants who advise the companies, and the recipients of bonuses.

As one would expect, in describing their compensation programs, most banks emphasize the importance of tying pay to performance. Indeed, one senior bank executive noted recently that individual compensation should hot be set without taking into strong consideration the performance of the business unit and the overall firm. As this executive put it, "employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak."

But despite such claims, one thing is clear from this investigation to date: there is no clear rhyme or reason to the way banks compensate and reward their employees. In many ways, the past three years have provided a virtual laboratory in which to test the hypothesis that compensation in the financial industry was performance-based. But even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks' financial performance.

Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.

P.3

For three other firms -Goldman Sachs, Morgan Stanley, and JP. Morgan Chase -2008 bonus payments were substantially greater than the banks' net income. Goldman earned $2.3 billon, paid out $4.8 billion in bonuses, and received $10 billion in TARP funding. Morgan Stanley earned $1.7 billion, paid $4.475 billion in bonuses, and received $10 billion in TARP funding. JP. Morgan Chase earned $5.6 billion, paid $8.69 bil1ion in bonuses, and received $25 billion in TARP funding. Combined, these three firms earned $9.6 billion, paid bonuses of nearly $18 billion, and received TARP taxpayer funds worth $45 bil1ion. Appendices A and B, attached hereto, provide further information on the 2008 earnings, bonus pools, and TARP funding for the nine original TARP recipients. We note that some ofthe nine recipients maintain that they did not request or desire TARP funding.

Other banks, like State Street and Bank ofNew York Mellon, paid bonuses that were more in line with their net income, which is certainly what one would expect in a difficult year like 2008; For example, State Street earned $1.8 billion, paid bonuses totaling approximately $470 million, and received $2 billion in TARP funding. Thus, the relationship between performance of the firms and bonuses varied immensely and the bonus incentive system does not appear to have been tethered to any consistent principles tying compensation to performance or risk metrics.

Attachment:
Bonus Report

It seems that different corporate companies have different rules on how they compensate their top producers and execs with bonuses and perks in a down economy and when the companies loss profit. Banks and investment firms especially that took bail out money don't have clear reason to way they compensate and reward their employees from the bottom to the top execs. I question this because when Disney Corporation ousted now former Michael Eisner as CEO and replaced him with Robert Iger in 2005, Mr. Iger's employment agreement and compensation was structured very differently unlike the current CEOs of companies that received TARP money.

This is the Disney CEO Robert Iger's Employment Agreement between the The Walt Disney Company and Robert Iger, dated as of October 2, 2005. Click here for the full-text of Iger's employment agreement. And here was an interesting finding in Iger's contract with Disney.

Business Law Professor blog:

In a recent SEC filing, Disney disclosed that the employment contract of Bob Iger, its new CEO, provides that Iger can be terminated for cause if he, among other things, fails “to cooperate … with any investigation or inquiry into his or the Company’s business practices … including … Executive’s refusal to be deposed or to provide testimony at any trial or inquiry.” According to this Fortune article:
What that means in English is that if Iger stonewalls an investigation (like, say, former AIG CEO Hank Greenberg) or pleads the Fifth, the board can send him packing without his golden parachute. “This clause is quite unusual,” says Stephen Fackler, an attorney at Gibson Dunn & Crutcher who’s crafted hundreds of compensation plans. “Presumably it signals the efforts of the board to establish a different sort of board-CEO relationship in the post-Eisner era.”

The clause likely was also motivated by the heat the Disney board took with respect to Michael Ovitz's employment agreement. Ovitz received a parachute payment of $140 million after a 14-month stint at Disney. Shareholders sued the board claiming, among other things, that it should have terminated Ovitz for cause thus avoiding the parachute payment.

By the way, Disney shareholders are now asking to have say in executive pay and compenstion in which Disney Corp. opposed that proposal. The only way to correct the current situation of the companies that took TARP money and awarded their CEOS and execs bonuses when the companies were losing profits is to allow shareholders their rights to decide to award the CEO and board execs compensation pay and bonuses. Unfortunately the companies are not allowing the shareholders their rights for disclosure, transparancy, and to evaluate the performance of the CEO and board members when the shareholders are the ones that are gambling with their assets in a company for a return on their investments. And it would be interesting to see all of the bank execs' employment agreements as well as the lower level bank employees' employment agreements and compare. I bet that would be a shocker.