Blankfein Emulating Buffett as No. 48 in Wall Street CEO Pay

Lloyd C. Blankfein, CEO of Goldman Sachs Group Inc.
Lloyd C. Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., leaves a hearing on Wall Street and the financial crisis in Washington, D.C., on April 27, 2010. Photographer: Joshua Roberts/Bloomberg

Wells Fargo & Co.’s board of directors had a busy final week of 2009. On Dec. 23, the San Francisco-based lender returned to the Treasury the $25 billion it had borrowed under the U.S. government’s Troubled Asset Relief Program. That freed the bank from the Treasury’s rules on executive pay.

The next day, the board made John Stumpf the best-paid chief executive officer of the 50 biggest financial companies by awarding him shares of Wells Fargo stock valued at about $10 million.

Stumpf, 56, earned his No. 1 ranking in Bloomberg Markets’ Finance 50 by receiving $21.3 million in salary and stock in 2009, more than doubling his 2008 compensation, Bloomberg Markets reports in its July issue.

Jay Fishman, CEO of insurer Travelers Cos., is No. 2, earning $20.6 million, up 42 percent, most of it in stock, options and other performance-based compensation.

John Finnegan of insurer Chubb Corp. is No. 3, at $19.2 million, a raise of 13 percent.

The three men are defying a trend.

In 2009, many of the CEOs of big financial firms shunned the huge paydays that embarrassed them during the meltdown of

2008. Lloyd Blankfein, CEO of Goldman Sachs Group Inc., whose $40.95 million in compensation ranked him No. 1 in 2008, fell to No. 48, with $862,657, right next to Berkshire Hathaway Inc.’s Warren Buffett, who made $175,000 -- $75,000 of which was a director’s fee from Washington Post Co., a Berkshire holding.

Pandit No. 50

Citigroup Inc.’s Vikram Pandit, No. 3 last year, dropped to No. 50 after agreeing to take $1 in salary for 2009 and no bonus. (His total for the year was $128,751, reflecting compensation in the weeks before he took his pay cut.)

JPMorgan Chase & Co. CEO Jamie Dimon was paid a total of $1.32 million in 2009, a 96 percent drop from 2008.

The compensation figures don’t include money and stock paid after 2009. Goldman’s board, for instance, awarded Blankfein $9 million in restricted stock in February 2010 for his 2009 performance. Dimon got $17 million in restricted stock and options.

The Wall Street CEOs are hoping that lower compensation will buy them some cover from the public outrage over the government’s bank bailout, says Kenneth Feinberg, the Obama administration’s special master on executive pay.

“How do you justify those three people dropping?” Feinberg asks, referring to Blankfein, Dimon and Pandit. “You justify it by saying that they don’t want to deal with the political consequences and the heat of this.”

Pay Master

The 64-year-old Boston lawyer was appointed by the Treasury Department in June 2009. The order creating his office gave him control over the compensation of the 25 top earners in the financial institutions that were the biggest recipients of TARP funds.

In addition, he advised on the pay of the 75 next-highest-paid workers at the firms.

Feinberg, who also oversaw the September 11 Victim Compensation Fund, told Bloomberg Television on Feb. 8 that he and Blankfein had spoken about how Goldman Sachs should approach compensation.

“To a large extent, I think he has succeeded in adopting the prescriptions we laid out,” Feinberg said.

The pay cut suffered by Blankfein, Dimon and Pandit “demonstrates better than anything the political impact of what I’m doing,” Feinberg says, speaking from his office near the 163-year-old Willard Hotel on Pennsylvania Avenue in Washington, a block from the White House. “I think they feel that it is unwise at this stage to be seeking lavish compensation packages.”

‘So Aggravating’

Twenty-two of the Finance 50 firms received money from the TARP program, according to data compiled by Bloomberg.

“Feinberg’s contribution was to be so aggravating that these companies wanted to return the TARP funds as soon as possible,” says James Reda, managing director at New York-based compensation consultant James F. Reda & Associates LLC.

Fourteen of the 22 paid TARP back in 2009 or early 2010; as of May 25, eight were still in the program, including four of the 21 companies whose CEOs got pay raises in 2009.

“It deserves to get asked again and again: whether handing out pay raises while feeding on taxpayer funds is fair,” says Bob Jones, CEO of Old National Bancorp, an Evansville, Indiana- based lender that was one of the first to repay its TARP loan, which was $100 million.

Balancing Act

“Bankers have to balance the public scrutiny with the need to retain and motivate management,” says Jones, whose company wasn’t big enough to make the Bloomberg ranking.

Jones asked his board of directors to withhold pay raises for him and his top executives in 2009, “given the extraordinarily difficult banking industry and general economic environment,” according to a company filing. The board’s compensation committee obliged, cutting Jones’s pay by 13 percent to $1.23 million.

Overall, pay for the highest-ranking financial executives is dropping. Average compensation for the Finance 50 CEOs fell 21 percent in 2009, to $8.95 million from $11.4 million a year earlier, according to Bloomberg data. That follows a 19 percent decline from 2007, when average compensation was $14.1 million.

Yet the political pressure has not dissipated. President Barack Obama has proposed to tax the big banks to claw back any losses from TARP.

‘Obscene Bonuses’

“We want our money back, and we’re going to get it,” Obama said in a White House press conference in January. “My determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people.”

No specific legislation has yet been proposed.

Not all of the Finance 50 CEOs took their cues from the political rhetoric. Some pulled down big paychecks even while providing relatively little value for the money they earned during the two years of the financial crisis, according to Bloomberg data. Henry Meyer III of KeyCorp, a Cleveland-based lender, topped the ranking of those providing the least value for the years 2008 and 2009. Meyer, 60, received a 21 percent increase in his 2009 compensation, to $8.15 million, though KeyCorp posted eight consecutive quarterly losses for the period ended on March 31.

The lender is still sitting on $2.5 billion in TARP funds.

Least-Value Ranking

The least-value ranking is based on KeyCorp’s stock return for 2008 and 2009 -- down a total of 76 percent to $5.55 from $23.45 -- combined with Meyer’s pay over the same period per million dollars of assets.

KeyCorp spokesman Bill Murschel says Meyer was rewarded for “strengthening capital levels, liquidity and funding ratios.” He says Meyer’s base salary increase, to $1.64 million, was funded in stock and can’t be redeemed until the bank pays back TARP.

No. 2 in the least-value ranking is Dowd Ritter, CEO of Birmingham, Alabama-based Regions Financial Corp. He stepped down as CEO on April 1 after the bank, which has branches in 16 U.S. states, suffered losses totaling $6.63 billion for 2008 and

2009. Nevertheless, his $9.67 million in 2009 compensation represented a 42 percent raise.

Regions Financial still owed TARP $3.5 billion as of May


No. 3 in the least-value ranking is Christina Gold, CEO of Englewood, Colorado-based Western Union Co. and the only woman in the Finance 50. Gold’s compensation almost quadrupled to $8.14 million in 2009 from $2.19 million in 2008.

Challenging Conditions

Company spokesman Tom Fitzgerald says the board’s decision to raise Gold’s pay “involved the company’s anticipated performance against the impact of external factors on the company, such as the challenging global economic conditions in


Gold, who has announced she will retire on Sept. 1, struggled to find growth for the world’s biggest money-transfer business as the economy stalled and unemployment soared among the migrant families that are some of Western Union’s most frequent customers. The company forecasts little or no revenue growth in 2010. Its stock fell 22 percent in the two years ended on Dec. 31.

The pay cut that JPMorgan’s Dimon took put him at the top of the ranking of financial CEOs providing the best value for the money, according to Bloomberg data. JPMorgan never had a losing quarter during the crisis of 2008 and 2009; it repaid $25 billion in TARP funds in June 2009.

Wells Fargo Outperforms

No. 2 in the best-value ranking is Stumpf, whose bank reported four straight quarters of profits in 2009 as revenue climbed from mortgage banking and costs declined from its 2009 purchase of Wachovia Corp.

Wells Fargo’s stock was up more than 250 percent as of May 25 from its low of $8.12 on March 5, 2009.

“We increased John Stumpf’s compensation because the company’s size and complexity grew after the acquisition of Wachovia and because the 2009 performance was at the very top,” says Steve Sanger, head of the Human Resources Committee of Wells Fargo’s board of directors and a former chairman and CEO of General Mills Inc.

Buffett’s Omaha, Nebraska-based Berkshire Hathaway is the biggest Wells Fargo shareholder, with 320 million shares valued at $9.96 billion on March 31. Buffett, who hasn’t taken a pay raise from Berkshire in 29 years, has strong opinions on what he regards as excessive CEO pay.

Buffett’s Letter

In his annual letter to Berkshire shareholders this year, Buffett wrote that a financial CEO should “bear full responsibility” for risk control at his institution and that if the government is forced to come to his rescue, “the financial consequences for him and his board should be severe.”

Buffett didn’t respond to requests for comment on Stumpf’s pay package.

Too many CEOs and the boards of directors who decide their pay still seem to be deaf to the anger that surrounds the issue in Congress and the country at large, says Kurt Schacht, managing director of the Charlottesville, Virginia-based CFA Institute, which certifies financial professionals.

“You still see some very questionable practices, such as CEOs taking large pay increases when their performance has been dismal,” Schacht says. “A lot of financial industry executives are taking credit for improvements in their stock price that really are a reflection of the government bailout.”

Feinberg Impact

Feinberg says the period since he took his job in June 2009 is too short to evaluate the government’s long-term effect on financial CEO pay.

“We have to wait another year or two to see whether what I am doing has an impact or whether memories are short and you go back to the old way of doing things,” he says. “I would like to see lower pay in the aggregate. I would like to see more stock and less cash. I would like to see no guarantees, no retention payments.”

As Feinberg leaves the scene -- with TARP paybacks, he retains control of pay at only five companies -- others will take up his cause. Congress, the Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corp. and the Group of 20 nations are all considering imposing restrictions on the pay of financial CEOs.

The Federal Reserve in April told executives from two dozen U.S. banks they must end pay practices that encourage excessive risk taking by tying compensation to short-term returns. Fed officials are regulators and auditors of the biggest banks, including Bank of America Corp., Morgan Stanley, Citigroup, Goldman Sachs and JPMorgan Chase.

Fed Directives

In meetings with executives and board members, Fed officials also told them to ensure that managers of individual business units aren’t given too much discretion over employee compensation. The central bank’s directives are included in written guidelines published in October. Banks are required to show the Fed they have set up internal systems to monitor compliance.

Investors take the Fed’s side.

“What gets us crazy is when we see CEOs with a short-term focus -- as we saw leading up to the mortgage crisis,” says Matthew McCormick, a banking-industry analyst and portfolio manager at Cincinnati-based Bahl & Gaynor Inc., which has $2.8 billion under management. “Let’s get back to the fiduciary responsibility of executives to treat capital judiciously instead of blowing it on extravagant pay or empire building.”

Not Washington’s Job

The CFA Institute’s Schacht says it shouldn’t be Washington’s job to lay down new rules.

“This really should not be driven by government intervention,” he says. “It should be the board of directors doing its job and having some responsibility to set reasonable pay practices. And the only way the board is going to do that is if they’re sensitized to the public outrage.”

Wells Fargo investor Gerald Armstrong is one aggrieved shareholder. At the bank’s annual meeting in April in San Francisco, Armstrong, an investor and shareholder rights activist, criticized CEO Stumpf’s pay and put forward a proposal that would give stockholders a nonbinding vote on executive and director compensation. Armstrong, who owns 38,000 shares and lives in Denver, recommended that the lender use its biggest shareholder, Buffett, as an example.

“I think the members of management are highly overpaid,” Armstrong says in an interview. “Why should Stumpf be rewarded for the performance of the past that is so poor?”

Shareholders and Compensation

The shareholders rejected Armstrong’s proposal in favor of a company resolution that gives investors a nonbinding advisory vote on executive compensation but not directors’ pay, the company says.

Shareholder groups favor a direct vote on executive compensation and the right to remove members of compensation committees who aren’t responsive to concerns over pay.

“If directors know they could lose their board seats, they will do a better job overall and be more careful in approving executive pay packages,” says Amy Borrus, deputy director of the Council of Institutional Investors in Washington.

While many financial firms have made changes in their compensation programs since 2008, Borrus says, it remains to be seen whether this is a short-term response to government pressure or a longer-term effort to improve shareholder value.

“The track record is not encouraging,” she says. “Historically, it has been all upside for finance CEOs and no downside risk. They were highly paid for performance that turned out to be short-lived.”

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