Unease Mounts Over Boards' Ultimate Say In Exec Pay

There's been plenty of uproar over the massive bonuses Wall Street firms have been awarding employees over the past two weeks. To try to diffuse that, Goldman Sachs scaled back its earlier plans for bonuses and announced that it's giving $500 million to charity. But Goldman is still paying employees a whopping $16 billion. JP Morgan Chase is paying out $9 billion, up 20 percent from last year.

That has critics saying there's something seriously broken with the compensation system on Wall Street — and taxpayers and politicians aren't the only ones upset.

Long-term investors in Goldman Sachs, Morgan Stanley and Bank of America have lost a lot of money during the recession. Those stocks are all down between 25 percent and 70 percent over the past three years. But executives and top employees at these and other financial firms are still rewarding themselves with billions of dollars in compensation and bonuses.

"It's completely crazy," says Frederick "Shad" Rowe, a money manager in Dallas and the former chairman of the Texas Pension Review Board. "And it makes people angry."

Rowe says bonuses and pay packages at many big public companies have gotten totally out of line and disconnected from performance. He says the S&P 500 is down about 30 percent over the past 10 years, while executive pay is through the roof.

"It demoralizes everybody," he says. "We live in a capitalist system, but the system has been co-opted."

No Consequences

Rowe says there has been a breakdown at the level of the board of directors for public companies. The boards, which approve the pay packages, are supposed to protect the interests of the shareholders — who own the company. But in reality, he says, many board members are paid a lot of money by company management. And, he says, they've become beholden to management.

Too often the boards approve huge pay packages that siphon money away from shareholders.

"A very small oligarchy has hijacked the system for its own short-term benefit," he says. "It's not right, and it's not in the interest of America and most Americans."

What's more, critics like Rowe say, these huge pay packages encourage the reckless risk-taking that created the financial crisis in the first place. After all, a lot of these same people at the major Wall Street banks clearly made catastrophic mistakes that helped to drive the economy into recession.

Unemployment, at 10 percent, is still extremely high. The housing market is still a mess. But Wall Street executives are getting giant bonuses again. Rowe says that's not the way capitalism is supposed to work.

"Hell no," he says. "They've taken my money and they get the benefit of it and they don't suffer the consequences."

John Gillespie is a former investment banker and author of Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions. He says the bonuses that some of the bailed-out banks are giving employees, on average, are 24 times what the average American has in his or her life savings. At the same time, he says, those savings have been "devastated by the bad corporate leadership in the board rooms of these very companies."

"People's anger is real and legitimate," he says. Conflicts of interest on corporate boards have led to out-of-control compensation, he says.

Linking Compensation, Performance

Of course, investors who don't like how executives are being paid can always sell their stock and pull out their money. But Rowe is heading up a shareholder rights group that is pushing for more power for shareholders to be able to get rid of directors that don't rein-in compensation.

"The issue of executive compensation has become politicized," says Fred Lipman, a lawyer who advises companies and who has written a book about responsible approaches to executive pay.

Lipman says the bank bailouts have politicians and other people particularly upset about bonuses right now, but the government should largely stay out of it. He acknowledges that there have been problems with excessive pay, but he says the market is reforming itself.

"Overwhelmingly, more and more compensation committees are getting it," he says, adding that corporate boards are trying to exercise best practices, and they're under pressure from a lot of constituencies to do so.

Lipman says he's glad that many of the major banks say they're planning to tie more compensation to the longer term performance of their companies. Bank of America, for example, is expected to start reclaiming or clawing back bonuses if an employee's bets later go bad.

But some who track executive pay don't think there has been much progress overall.

"We're seeing reform around the margins, but basically it is business as usual," says Patrick McGurn, an attorney with RiskMetrics Group, a company that advises investors on corporate governance issues.

He says the big bonuses this year are harkening back to the glory days of the industry, and the numbers are obviously eye-popping.

Meanwhile, President Obama is pushing for a 10-year, $90 billion bank tax to help reclaim bailout money, and the FDIC is floating a proposal to make banks pay a penalty for big pay packages that aren't tied to long-term performance.

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