Bank execs still cash in on the way out
Despite efforts from the government to limit executive compensation, many banks are still paying out huge sums to departing CEOs. Steve Henn reports in collaboration with the investigative newsroom ProPublica.
A business executive waiting for his pay (iStockPhoto)
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Kai Ryssdal: Before the administration's big announcement yesterday about its latest idea for executive compensation reform, its third try at it by the way, Congress had already spoken. Laws are already in effect that limit golden parachutes for banks that accept federal aid. But that hasn't stopped a lot of banks from paying huge sums to executives who are on their way out the door. Marketplace's Steve Henn reports now in a collaboration with the investigative newsroom ProPublica.
STEVE HENN: Mac Whittle built the bank, the Southern Financial Group, from the ground up. He founded it in the 80s and then bet heavily on the Florida real-estate market during the boom.
When the bust hit, large shareholders like Jack McMullen saw their stock investments collapse.
JACK McMullen: It went from $25 a share down to a low of I think about 65 cents.
McMullen says he lost more than a million dollars. And by late October it was obvious to him Southern Financial needed government aid to survive. The same day the bank applied for to the Troubled Asset Relief Program it also moved up the retirement date for Whittle, its CEO.
McMullen: They sent him out the door with $17 million.
Investors like McMullen were furious. If Whittle had stayed on after the bank accepted federal aid, his golden parachute would have been considerably smaller.
But despite TARP's ban on lavish severance packages, big payments for departing executives have continued.
Paul Hodgson is at the Corporate Library, a consulting firm that tracks executive compensation.
PAUL Hodgson: Almost as soon as these regulations came out, there were concerns that companies would immediately employ consultants to try and find a way around it.
In February Congress tightened the screws, banning all severance payments for top executives, and yesterday the administration issued new rules. But many banks already found ways around the ban.
Associated Banc Corp, based in the upper Midwest, took half a billion dollars in federal aid last fall. Then this May it paid its chief operating officer, Lisa Binder, $1.6 million to leave. But don't call it a golden parachute. Instead, Binder signed an agreement not to compete against the bank. The Corporate Library's Hodgson calls that cheating.
Hodgson: This is obviously a move on their part to somehow get around semantically the clause in the TARP regulations that prohibits payment for doing nothing.
In Virginia, Hampton Roads Bancshares took more than $80 million in federal aid, then paid it's departing CEO Jack Gibson $1.3 million. The bank's also paying for Gibson's car and his golf club membership.
But this deal wasn't a severance either. According to the bank, it's a three-year consulting contract with a twist. Gibson was paid entirely upfront. And the bank says the Treasury Department signed off on the deal.
JAMES Reda: The consulting agreement is a tried and true way of not calling something a severance.
James Reda is a New York based compensation expert. He says sometimes it's worth it to keep a former-CEO on the payroll but...
Reda: My experience has been that after about six or seven months, he or she runs out of things to do and it kinda becomes a sham at that point.
Starting this week Kenneth Feinberg, a prominent Washington lawyer, will begin serving as the so-called special master for executive compensation for TARP. Gene Sperling is an economist and advisor to Treasury Secretary Tim Geithner. He says Fienberg will have considerable power.
GENE Sperling: He will have the authority to review the compensation plans for the companies who we have described as receiving exceptional assistance.
Companies like AIG and GM. But more than 500 banks that have received TARP money are not going to be supervised by Fienberg.
In the past six months more than half-a-dozen of those banks have paid executives to leave. One bank bought its former CEO's house, others have offered to defer guaranteed payments. And it's unclear if Treasury can or will do anything to get this money back.
In Washington, I'm Steve Henn for Marketplace.
Comments
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From Seattle, WA, 06/13/2009
As a former consultant - not compensation - there is almost always a way around anything Congress or Legislatures pass and still be within the law. You can almost think of it as legislative judo - in judo you use the force of the other against them - so will executives in getting what they think they deserve.
Hence you have what happens here - can't pay bonuses - here is a large amount for non-compete. Here is a large amount to resign so that we are not affiliated with you anymore. Here is a large "loan" and if you default don't worry about it.
I certainly do not condone the acts these executives have taken in violating the spirit of legislative intent, however I have no love lost for Congress that thinks they can simply legislate behavior, either.
The solution here is that we, you and I, are to blame in that as shareholders we tolerate such behavior and as voters we do the same.
06/12/2009
It seems that these "must be highly paid because of their unique skills" executives spent the vast majority of their time worrying about how they will increase their pay and benefits while cutting expenses (staff) or getting around restrictions or shareholder revolts. If they used even 1/2 of this time and energy actually running the company, or at least learning what the company they work for does, then these companies probably would not be in the poor condition that they are in. I think that any pay for performance should be done primarily in stock grants that would not vest in less than 5 to 10 years. Maybe then these Super Executives might think long term rather than how they can manipulate the figures to justify a big payout even when the company is going down.
From Amberg, Germany, 06/12/2009
First, responding to one comment, I'm sorry Mr. Bourne but, Europeans don't make considerably less, they're just taxed to death. I've been living here in Germany for a while and the President of Deutsch Bank (Deutschebank to us Americans, one of the banks in the mortgage meltdown, gave it's CEO a 1.3 million Euro bonus because he is in with the governign party. In Europe it's government who makes the big money since the average tax rate is between %30-45. So comparing GDP they're just as criminal over here :) As far as the article goes, the problem is not so much the Administration, it's congress. The president still has to partition congress and submit a bill just like any other person (it helps the vice president is over the House), he only has the power to veto a bill. Congress are the ones who make legislation, lobbist lobby Congress not the president and, these banks and companies still have congressmen and senators in there pockets but, no one wants to talk about this part though.
From Richmond, TX, 06/11/2009
Right on! This notion that one has to pay these people millions of dollars a year is..... pure nonsense.... so what if they do flee to another bank or a hedgefund.... These two are screwed up...
Since these banks are now owned by the US Tax Payers they should make no more than the most important person that the tax payers... pay.... that would put the limit at $400k which is more than many people make in 10 or 15 years....
Sorry... but no.... Its out of control... and.... clearly doesn't work... since these are the same people who made the mess....
Limits are in order...!!
Most people are to young to remember this... but in the mid 70s we had a complete wage and price freeze.....
It would at least get their attention....
From Monroe, WI, 06/11/2009
Some problems have no solution. Also, why can't there be many causes adding up to reach a breaking point? I would suggest the major cause was money began to run everything instead of principles
06/11/2009
I only heard part of the interview, so forgive me if I missed this question, but I heard an interviewee say companies would be at a "distinct disadvantage" in getting talented people if they would be limited in what they can pay. This is a bizarre rationalization I've heard repeatedly, even as their companies crash and burn. I have a couple of followup questions: Arent't the guys who insist on these pay levels the same ones who have screwed everything up? And, Why don't we ask those questions of teachers, doctors, nurses, directors of small nonprofits, dancers, painters, writers ... this would be a very long list if I continued. If it really takes this kind of compensation to encourage these people of questionable talent to take these jobs, perhaps they don't have the right passion and temperament to do a truly good job. (Oh, and by the way, doesn't Europe pay their executives considerably less in proportion both to their US counterparts and their lower paid workers? Don't see flight form those countries ... Norway, anyone?)
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