By Bradley Keoun and Elizabeth Hester
Feb. 17 (Bloomberg) -- Wall Street bankers chafing at new limits on executive pay may have to accept the fact that the U.S. government is prepared to remake the nation’s financial system without them.
Bankers and their supporters, mostly executive-pay consultants, say the restrictions championed by U.S. Senator Christopher Dodd will prompt an exodus of talent. The response from politicians after banks lost $820 billion: So be it.
“Populism has completely taken control of the process,” said Jeff Davis, director of research at Howe Barnes Hoefer & Arnett, a Chicago-based brokerage. “It’s borderline pitchforks in the street.”
Dodd, chairman of the Senate Banking Committee, added the limits to the $787 billion fiscal stimulus bill approved by Congress on Feb. 13. President Barack Obama plans to sign the stimulus bill into law in Denver today, said his spokeswoman, Jen Psaki. Dodd has brushed aside concern the provision would weaken banks by driving away talent, saying there are plenty of potential replacements.
The American Recovery and Reinvestment Act of 2009 will force the top five executives at banks that get at least $500 million of bailout funds, and the 20 most highly paid employees at those firms, to forgo cash bonuses, according to an analysis by the Washington-based government-relations practice of Blank Rome LLP. The bankers can get stock bonuses, as long as the stock is restricted until their employer repays bailout funds, according to the law firm.
10 Times Income
The restrictions are on top of the $500,000 salary cap that the U.S. Treasury said it would impose on banks that require additional government assistance from the Troubled Asset Relief Program, or TARP. That limit is 10 times the household median income in 2007 and 25 percent higher than President Obama’s $400,000 salary.
“This latest bill puts the banks with TARP money in a real bind,” said Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs Group Inc. partner. While those few that can repay the government will race to do so, others “will not be able to recruit from the top manager pool.”
Administration officials decided not to fight Dodd’s provision because of the possibility it would have to go back to Congress to seek more bailout funds, according to a person familiar with the matter.
Foreign Rivals
“My main concern, around compensation for instance, is it’s okay to do the things that are being talked about at the very top,” Bank of America Corp. Chief Executive Officer Kenneth Lewis said at a hearing last week called by Representative Barney Frank. “But if you start to go too low in your organization you will run off key talent to foreign competitors.”
Morgan Stanley CEO John Mack and Wells Fargo & Co. CEO John Stumpf said at the hearing that they agreed with Lewis. Mack told Congress his firm introduced a three-year clawback provision to tie employee pay to that of long-term performance. Goldman Sachs CEO Lloyd Blankfein said his goal was to “keep the alignment of our people with the fortunes of the firm.”
Of the eight bank CEOs at the hearing, Lewis drew the highest 2008 salary at $1.5 million, while Blankfein took the lowest at $600,000.
‘Catastrophic’ Loss
Alan Johnson, founder of Johnson Associates Inc., a New York-based compensation consultant, said the rules may be “catastrophic” to Wall Street’s talent base. Lawrence Summers, director of the White House National Economic Council, used the same word on Feb. 9 to describe the potential fallout of a failure by Congress to pass an economic-stimulus package.
“You’re saying to the banks that you can’t compensate your revenue producers like you used to,” said Christopher Kelly, a New York-based partner and head of the capital markets practice at law firm Jones Day. “These are guys who have relationships. They have lots of value.”
The new pay caps have made top-producing Wall Street employees “nervous,” and those who can find other jobs will probably leave, said James Reda, who heads an eponymous compensation-consulting firm in New York. “Why would you want to be a political football?” he said.
Such arguments don’t dissuade Dodd, a Democrat from Connecticut, who said last week that “there are many qualified replacements” for Wall Street executives who quit. “Some very high earners will have to adjust compensation expectations and maintain a different sense of proportion than in the past,” Dodd said in a Feb. 14 statement.
Merrill Bonuses
Multi-million dollar pay packages made Merrill Lynch & Co. an easy target for New York Attorney General Andrew Cuomo. He told Frank in a Feb. 10 letter that Merrill had “secretly and prematurely” awarded $3.6 billion in bonuses just before the firm’s Jan. 1 sale to Bank of America Corp. The top four recipients split $121 million, or an average of about $30 million.
In North Carolina, Attorney General Roy Cooper said he was “appalled” to learn that Charlotte-based Bank of America, the recipient of $45 billion in rescue funds, paid bonuses to employees last year.
Some New York officials support the bill’s pay reforms, even though Wall Street’s home state would suffer the brunt of lower tax revenue as incomes drop.
‘New Breed’ Sought
“In light of the fact that taxpayer dollars are being used to help a lot of these companies out,” the plan appears to be “reasonable,” said Dennis Tompkins, spokesman for New York State Comptroller Thomas DiNapoli. “The long-term goal has to be restoring sustainability and long-term profitability to Wall Street, and this looks like a good step in that direction.”
Congress is seeking a “new breed of executive willing to do the job at the new pay scale,” said Frank Glassner, managing director of San Francisco-based Veritas Executive Compensation Consultants LLC. “There are truly talented people who would take on the job with lower pay, and they’re the people you want turning these banks around,” he said.
That group may include Citigroup Inc. Chief Executive Officer Vikram Pandit, who said at Frank’s hearing last week that he would take a $1 salary, or 8.3 cents a month, until the bank turns profitable. Citigroup, based in New York, reported a record $18.7 billion net loss last year and needed $45 billion of rescue funds.
‘New Reality’
“I get the new reality and I will make sure Citi gets it as well,” Pandit said.
Bank of America’s Lewis, asked at a shareholder meeting in December whether he would work for $1 a year for the next three years, replied, “No.” He noted that Bank of America earned $5.8 billion during the first nine months of 2008.
Spokesmen at Goldman Sachs, Morgan Stanley, Wells Fargo, Bank of America and Citigroup either declined to comment or didn’t return calls seeking comment on the pay restrictions.
The intangible rewards of public service may not be enough to sustain Wall Street employees who go there to get rich, said Samuel Hayes, professor emeritus of investment banking at Harvard Business School.
“For a year I can see the top people saying, ‘We’ll swallow our sense of justice and go with it,’” Hayes said. “But they certainly wouldn’t stay out of a sense of duty for very long.”
To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net.
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