Congress Questions Wall Street Executives on Pay (Update3)

By Ian Katz

March 7 (Bloomberg) -- A House committee questioned Wall Street executives today over compensation awards reaching hundreds of millions of dollars while shareholders bear the brunt of billions in writedowns from subprime mortgages.

Former Chief Executive Officers Charles Prince of Citigroup Inc. and Stan O'Neal of Merrill Lynch & Co., and current CEO Angelo Mozilo of Countrywide Financial Corp. testified before the House Oversight and Government Reform Committee in Washington.

``There seem to be two different economic realities operating in our country,'' said Henry Waxman, a California Democrat and chairman of the panel. ``Most Americans live in a world where economic security is precarious. But our nation's top executives seem to live by a separate set of rules.''

The increase in congressional scrutiny follows more than $188 billion of asset writedowns and credit losses reported by the world's largest banks and securities firms since the beginning of 2007. Merrill and Morgan Stanley, two of Wall Street's biggest firms, are planning changes to executive pay packages in response to investor backlash.

Shareholders are wielding ``pitchforks like the last scene of Frankenstein'' and demanding companies not ``pay for failure,'' said Frank Glassner, CEO of San Francisco-based Compensation Design Group Inc., an advisory group on pay issues.

`Management's Interests'

O'Neal resigned from Merrill in October with a $161.5 million package including stock bonuses from prior years. Prince kept about $30 million of stock and options when he stepped down the next month. Mozilo, who collected $121.7 million in 2007 selling Countrywide shares, agreed to forgo $37.5 million in severance and consulting fees in connection with Bank of America Corp.'s proposed takeover of the mortgage lender, which lost 86 percent of its market value in the past year.

O'Neal, 57, defended Merrill's pay practices at today's hearing. ``The compensation of senior management at Merrill was determined through a rigorous and independent process, and consistent with pay levels in the industry,'' he said. Prince, 58, said Citigroup ``worked hard to align management's interests with the interests of shareholders.'' Mozilo, 69, said his company's pay was tied to performance.

Goldman Compensation

Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, said today that it awarded $67.5 million each to Co-Presidents Gary Cohn and Jon Winkelried, boosting their pay 27 percent from the prior year as the company evaded the mortgage losses spreading through the economy.

Goldman, based in New York, disclosed the awards in a regulatory filing.

The House approved a measure last April giving investors a non-binding vote to protest excessive compensation. In the Senate, the measure doesn't appear ``ready to go anywhere,'' said Jeffrey Mahoney, general counsel for the Washington-based Council of Institutional Investors, which represents pension funds with more than $3 trillion in assets.

Countrywide ignored a consultant's recommendations to rein in Mozilo's pay, then hired an adviser he considered his ``personal representative,'' Waxman's committee said in a report released yesterday.

A compensation consultant in 2006 recommended benchmarking Mozilo's pay to more relevant competitors and urged changes that may have lowered cash and equity bonuses, the report said. Countrywide then brought in a consultant from Stamford, Connecticut-based Towers Perrin to scrutinize the proposal from the previous consultant, Libertyville, Illinois-based Exequity.

`Maximum Opportunity'

He urged linking Mozilo's pay to that of CEOs at banks such as Goldman Sachs Group Inc., Merrill Lynch & Co. and Bank of America Corp.

``Although the company retained Towers Perrin, internal e- mails show that the consultant appeared to serve as Mr. Mozilo's personal adviser with the goal of achieving maximum opportunity for Mr. Mozilo,'' the congressional memo said. ``The final contract was significantly more generous to Mr. Mozilo than Exequity originally recommended.''

Jumana Bauwens, a spokeswoman for Calabasas, California- based Countrywide, declined to comment on the memo yesterday. A request for comment left at Mozilo's office wasn't returned.

Towers Perrin, as a matter of company policy, isn't hired by ``an individual executive,'' company spokesman Joseph Conway said. ``Countrywide Financial engaged Towers Perrin, and Towers Perrin neither represented nor acted as a personal advocate for Mr. Mozilo,'' he said.

`Performance-Contingent'

The oversight committee released a report in December saying almost half the largest U.S. companies hired pay consultants in 2006 with conflicts of interest that most didn't disclose.

Those same consultants now are saying they're getting requests from companies to redesign their compensation plans.

``You'll start to see a flood of performance-contingent plans,'' Glassner said. Compensation consultants are ``working around the clock'' designing tougher pay programs for publicly traded companies, he said.

Merrill, the world's largest brokerage, said in January it wouldn't pay 2007 bonuses to three top executives after the New York-based company reported an annual loss of almost $7.8 billion. Merrill said it would begin awarding ``retention'' options tied to the company's stock price.

Citigroup, the largest U.S. bank by assets, reported a record fourth-quarter loss. Morgan Stanley CEO John Mack didn't take a 2007 bonus after the third-biggest U.S. securities firm by market value wrote down $9.4 billion in debt securities during the fourth quarter and reported its first loss.

Board Members

Besides the chief executives, the House panel questioned board members from the three companies who were in charge of approving the pay packages, including Time Warner Inc. Chairman Richard Parsons, a member of Citigroup director.

The move toward tying a greater proportion of executive pay to performance is also related to the growing influence and responsibility of corporate boards.

``There's a lot more scrutiny'' from shareholders and the U.S. Securities and Exchange Commission, said Theodore Sharp, managing director in the Boston office of compensation consultant Pearl Meyer & Partners.

The SEC began requiring all public companies to provide more information about stock-option awards in 2006 and the compensation of its highest-paid employees. The Washington-based regulator reviewed the disclosures of 350 companies last year to evaluate how different industries were complying with the rules.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net .

Last Updated: March 7, 2008 14:37 EST

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