$2 billion pay day for failure

Posted by: Nanette Byrnes on September 25, BusinessWeek

The top executives at AIG, Freddie Mac, Fannie Mae, Lehman and Goldman Sachs pulled down more than $2 billion in pay over the past five years according to a new analysis by a professor at San Diego State University’s Charles W. Lamden School of Accountancy, Dr. David DeBoskey.

Henry Paulson, who in his current role as Treasury Secretary is pushing for a bank bailout, accounts for $82 million of the total. That was his pay for three years (2003 to 2005) as CEO of Goldman Sachs. DeBoskey included the pay of 57 different individuals, pulling the data that companies report on their top 5 officials to the Securities & Exchange Commission, to get to the $2.1 billion total.

Now-bankrupt Lehman Brothers, the smallest of the five companies, was tops in pay. It doled out $743 million in compensation for all its top officers from 2003 through 2007. Next was Goldman Sachs with $726.5 million, then AIG at $336 million, Fannie Mae at $207.2 million and Freddie Mac at $90 million.

Applying the same analysis to a broader universe of banks, financial firms, insurers, mortgage brokers and others who DeBoskey identifies as the companies likely to benefit from the proposed bailout and the total executive pay comes to $27 billion.

“I’m not surprised by too much in life when it comes to corporate America,” says DeBoskey, who was a corporate controller and CFO for many years before returning to school to earn his doctorate. DeBoskey’s last role was comptroller of mortgageIT.com, a public company bought by Deutsche Bank in 2004.

But even though DeBoskey describes himself as a “cynic” when it comes to moves to limit executive pay, he sees this as an inflection point. Moving forward boards of directors will have to find some better way to link executive pay to actual results, he says. “If the middle class is going to pay for this bailout through tax dollars, what they’re reimbursing these companies for is all this excess compensation. In my minds eye this is a classic redistribution of wealth from middle class tax payer to the rich who have received all this excess compensation,” he says.

Part of the current debate in Washington centers around limiting the executive compensation tax deduction. But DeBoskey is skeptical that will do much. The deduction is already limited to $1 million of compensation, but that hasn’t stopped the average S&P 500 CEO from making $10.5 million last year, 344 times the pay of a typical American worker according to a recent study by the Institute for Policy Studies.

To those who dream of getting some of these billions back, DeBoskey gives little encouragement. Attempts to do that on the pay of long time New York Stock Exchange chief Richard Grasso failed. But that doesn’t mean future contracts might not write some form of give-backs into compensation. “A prospective and logical approach,” says DeBoskey, “would be to build in triggers and traunches of pay over time that are tied to performance. The payout of the cash occurs ex-post these events, they occur over some reasonable time period.”

$2 billion in five years to 57 individuals ought to give that cause some momentum. It certainly gives a whole new meaning to the concept of the price of failure.