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Sin of wages? Anger leads to TARP rules and say on pay
Odds are strong that executive compensation for bankers will evolve as post-crisis anger and angst focus on risk and corporate governance
By Steve Cocheo, executive editor,
Executive compensation has been controversial in Corporate America for years, now, but talk to the man on the street about it today, and you’ll likely see a kneejerk case of apoplexy, especially if you link the word “banker” to it.
Many bankers feel that their compensation—indeed their industry—has been tarred unfairly by a very broad brush. But in an age when “bank” is used to describe everything from investment bank behemoths to single-office community banks, it’s hard to keep the tar off, and to keep the tar from turning into law.
“I understand the angst reverberating through the country today,” says banker Ted Awerkamp. “But from a community bank perspective, why have a board of directors if they are going to legislate caps and fences?”
The truth is, says Awerkamp, president and CEO of $1.7 billion-assets Mercantile Bancorp, Quincy, Ill., “community bank shareholders aren’t paying crazy numbers” to executives.
Unfortunately for banks like Mercantile, they live in an age of distrust, and Congress is going to at least mandate looks over the shoulder for many, and has already mandated stronger involvement for TARP banks.
Compensation should be a matter of board decision, agrees Charles Elson, professor at the University of Delaware and director of its John L. Weinberg Center for Corporate Governance. “To actually have the government take a role in management bothers me,” says Elson. “If you want long-term economic growth, to have the fuel of that growth directed by government is not productive.”
But that’s not the way things are headed in Washington. We explore this in this opening section, and take deeper looks at two facets—risk and corporate governance—in the two sections that follow.
TARP banks and compensation
In some ways, TARP has been a bait-and-switch game. Bankers were urged to sign up in the earliest days. Only months later did the restrictive compensation limitations of being a TARP bank arise.
“If you are a TARP bank, you are kind of … toast,” says compensation consultant Susan O’Donnell, Boston-based managing director for the Pearl Meyer & Partners consultancy. The oversight of the “Pay Czar” is only the overlay of federal limitations imposed on the 400-odd institutions for taking government money. These banks, in the interim final regulations issued in June, face the “TARP 12,” a set of proposed requirements. These include: senior executive pay limitations; establishment of wholly independent compensation committees; submission of executive compensation to a nonbinding shareholder vote (the “say on pay” concept); and in some circumstances, “clawbacks,” where the government seizes paid earnings (allegedly not earned).
O’Donnell notes that as of mid-August, there have already been more than 100 TARP-based say-on-pay proposals. In no cases did the shareholders’ vote result in a nonsupportive outcome, she says, but many came close.
“A 60% ‘yes’ result is not great,” says O’Donnell. “It means that 40% of your shareholders don’t like what you are doing.”
There are concerns that this is already reducing the incentive component in executive compensation, and shifting pay packages more towards straight salary. “That’s clearly in conflict for what’s best for the organizations, and for their shareholders,” says John Koelmel, president and CEO of First Niagara Financial Group, Inc. The $9.6 billion-assets company, which is growing into a regional powerhouse from an upper New York State base, took TARP funds but repaid them early, and Koelmel is grateful his bank got out before it affected compensation strategy. His own package, he points out, is heavily weighted towards compensation based on performance over time.
Say on pay developments
What TARP banks already live with in terms of say-on-pay requirements, all public companies, including banks, could be subject to under the pending Corporate and Financial Institution Compensation Fairness Act, passed by the House this summer. H.R. 3269, would require nonbinding say-on-pay votes; would mandate compensation committees independent of management; and more. Due to ABA advocacy efforts, there is some provision for excluding smaller financial companies, but the matter still has to evolve in the Senate, where it is favored by Chairman Chris Dodd (D.-Conn.) of the Senate Banking Committee.
Where does the impetus come from? House Financial Services Committee Chairman Barney Frank remarked in a recent speech that shareholders had to be involved because, in his view, directors can’t do the job.
“We have the radical notion on the Democratic side that the shareholders who own the company ought to be able to set outer limits on pay,” said Frank. “That’s because the notion that it will be done by the board of directors is fruitless because boards of directors and CEOs are inevitably the closest of collaborators. There is not, and should not be, an adversarial relationship between the CEO and the boards of directors. I think it’s impossible to structure one in a well-functioning organization. It’s a mistake to think that one day a year, they’ll go to arm’s length and be labor and management.”
The very threat of say-on-pay has driven some changes in behavior. In a joint interview, Patrick Cole and Timothy Reimink of Crowe Horwath, indicated that some financial institutions, believing that say-on-pay is already effectively here, have engaged the firm to facilitate meetings with large stockholders who are not board members. The idea is to get their input on issues such as compensation.
Cole says the meetings have typically been positive. “They are interested in peer group comparisons,” he says, “There is an appreciation for fair pay. Actually, it’s been a pleasant surprise that these folks don’t see a need for reductions in pay. They want to be supportive.”
Banker Ted Awerkamp says the desires of community bank shareholders are being misunderstood if anyone thinks they really want “say on pay.” His holding company went public in 2005, and this led to a change in director attitude. “Our board became much more involved and much more accountable for salary and benefit judgments,” says Awerkamp. “The shareholders want liquidity, they want transparency, but they also expect directors to do their jobs.”
Koelmel is blunter about say on pay. “You can wind up with just as much of a train wreck” that way, he says, as some institutions did with the established order.
Ultimately, while everyone has a personal interest in executive compensation if they are in top management, corporate stewardship plays a big part in their concerns. “Brain drain” is what they call the fear that any bank facing compensation restrictions will see the best talent walk.
This isn’t just an issue for Wall Street. Awerkamp, for instance, says his company’s subsidiary banks compete in local markets, against non-public banks. Any law that pushed restrictions in pay down to the subsidiary banks would put him at a disadvantage to the other institutions, and he doesn’t doubt that he would lose talented players.
Further, Charles Elson worries that some institutions, in a bid to avoid brain drain, will attempt evasion of the letter of the coming laws. That would be terrible for investors, he said.
And that, ultimately, is who all the new efforts are supposed to be helping. BJ
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0909/index.php?startid=20