Obama Tightens The Screws On Firms That Were Bailed-out

PRESIDENT Barack Obama's administration is poised to order cash salary cuts of 90 per cent on average for top executives at firms that received the biggest government bailouts, according to media reports yesterday.

The seven companies that received the most government assistance at the height of the US financial crisis will each be required to cut the salaries of their 25 best-paid executives. The firms are AIG, Bank of America, Citigroup, General Motors, GMAC, Chrysler and Chrysler Financial.

Smaller companies and those that have repaid the bailout money, including Goldman Sachs and JPMorgan Chase, are not affected. These banks last week reported record quarterly profits and have set aside tens of billions to reward their staff. Goldman, for example, has earmarked US$16.7 billion (S$23 billion) for compensation so far this year, or more than US$500,000 per employee.

For the affected seven firms, the biggest cuts will be to the cash portions of the 175 employees' salaries, which will be slashed by an average of 90 per cent, and will mostly fall below US$500,000, the Wall Street Journal said.

- The 175 executives targeted by 'pay czar' Kenneth Feinberg are not only the highest-paid but also considered among the most talented and productive from seven companies that have received billions of dollars in taxpayer money.

Their base salaries will be slashed by an average of 90 per cent.

- That applies to the five top executives and the next 20 highest-paid employees at Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial.

- Another 525 employees at the companies will also face new curbs on pay from Mr Feinberg, but those details have not yet been released.

- The government did not want to make executives return compensation already received this year, but the reduced pay levels will be the base for making decisions on salary in 2010.

- The executives will still be subject to compensation limits as long as their companies are receiving support from the government's US$700 billion (S$975 billion) bailout fund. Their total compensation was being cut in half, on average.

- Cash salaries will be limited to US$500,000 for more than 90 per cent of affected employees. Personal expenses for such perks as company autos and corporate jets will be capped at US$25,000 without approval from Mr Feinberg's office for higher payments.

- The pay restrictions for all seven companies will require any executive seeking more than US$25,000 in special benefits - things such as country club memberships, private planes and company cars - to get permission for those perks from the government. -- AP

The New Compensation For Investment Bankers?

This will be a good point of discussion during the Financial Markets Career talk. The present global financial crisis may actually result in some changes in how salaries and bonuses are to be paid. The following are the latest information from Royal Bank of Scotland. Base salaries for 1st- 3rd years bumped by $10K. Their starting pay now will be:
1st year base: $70k
2nd year base: $80k
3rd year base: $90k

3rd years promoted to Associate: Base: $100K- no signing bonus

Numbers out today for Global Banking and Markets. All bonuses are 100% deferred- over 3 years, subject to clawbacks. Terms still not defined.

Bonus Ranges:
1st year: $40k-$50k
2nd year: $50k-$60k
3rd year: $60k- $70k

What that means is that these bonuses are declared only and can be clawed back within a certain period if performance of the unit or company does not match up to predefined criteria.

Example, a second year RBS employee may be on $80,000 a year ... I think their year end is June, so the declared bonus for this employee may be $55,000. The terms are not clear yet but if there is a clawback, it will mean that the employee won't get to see the bonus for a certain period, say 2 years. Within that 2 years, the employee's performance, his/her department's performance and/or company's overall performance must match up to predefined criteria - then and only then will the employee get his/her $55,000 bonus. That amount may be lesser if any of the predetermined criteria were to be not attained.



p/s photos: Kou Shibasaki

Quibbles Over Top Executive Pay

Financial Talent In Asia Hits New Ground

We have heard of the often outrageous pay packages for many of the American CEOs. The figures are so stratospheric that it does not make any sense to the common folk. You do a job, and you do it well, then get paid well - not paid out of this world. the CEOs pay should be no more than 30x-50x the pay for fresh graduates joining the company. Anything totalling more than that is hard to justify. Of course the more socialist your leanings are, the lesser the multiple. We can all argue till the cows come home on what is fair, but in a capitalistic world, what is paid will be closer to the 50x mark rather than the 20x mark.

When you have boards allowing CEOs to market their pay packages to the top quartile of fellow CEOs, its a never ending game. Now lets look at some interesting developments in Asia. The HK$10 million (US$1.28 million) annual pay of de facto central banker Joseph Yam Chi-kwong and the Exchange Fund's heavy management cost came under sharp fire from lawmakers dissatisfied with the poor investment performance last year. Hong Kong Monetary Authority chief executive Yam, Hong Kong's highest-paid official, took home a paycheck of HK$9.97 million last year, up 12% from 2004, boosted mainly by a 32.9% rise in his performance-linked pay component, which came in at HK$2.5 million. His fixed pay rose 3.55% to HK$6.7 million. Yam had already requested a pay freeze in 2006.

Members of the opposition fiercely criticized Yam's remuneration for being the highest among the world's top central bankers. It was well above US Federal Reserve board chairman Ben Bernanke's US$183,500 (HK$1.43 million) 2006 salary. It is not entirely fair to compare Yam's pay with Bernanke as the Fed operates in a committee, and US levels are not necessarily the best benchmarks anyway, especially for government type positions. In Singapore the top politicians all get paid a lot more than US politicians, including the President post.

But Marvin Cheung Kin-tung, chairman of the Exchange Fund Advisory Committee governance subcommittee, which oversees the governance issues of the HKMA, defended Yam at the Legislative Council panel meeting on Thursday, maintaining that HKMA staff were underpaid compared with the market for financial talent in the SAR. Backing this point, Christopher Munn, the HKMA's executive director for corporate services, said it is facing increasing staff turnover. Last year it was 8%, much higher than the previous year's figure which he didn't disclose. Munn said in order to address the high turnover, the HKMA had to raise staff salaries by an average of 4.2% and hire 10 more staff this year. Some lawmakers suggested Yam's pay be linked to the performance of the HKMA-managed Exchange Fund. Given its poor 3.1% return last year - the lowest since 2001 - Yam should have his pay cut, they argued.

However, Cheung said besides managing the Exchange Fund's investment, Yam has four other roles - maintaining the stability of the Hong Kong dollar, the financial and banking systems, and improving the market infrastructure. He regarded Yam as having done well in all five roles. Lawmakers also lashed out at the high management cost for the Exchange Fund, noting it skyrocketed by 4.36 times from HK$186 million in 1997 to HK$811 million in 2005. Stripping out the new accounting rules that came into effect in 2005 and other non-investment management related items, Yam argued the increase was just 3.49 times. He justified the increase in costs by noting that the fund's size jumped to HK$1,066 billion at the end of 2005 from HK$636 billion in 1997.

Yam said the average return rate was 5.7% over the past seven years, higher than the 5% required by lawmakers and the average 4.5% benchmark investment portfolio return rate set by the authority and then approved by the investment subcommittee under the Exchange Fund Advisory Committee tasked with appraising the performance of the Monetary Authority. Much of the quibbling has to do with the Exchange Fund's dismal returns of just 3.1% last year. Yam attributed last year's paltry 3.1% return to the restrictions placed on the fund's investment strategy, which forces the authority to invest in highly liquid assets with low risk so cash remains available to fend off attacks on the Hong Kong dollar.

Overall, I think Yam is underpaid based on what he can get in the private sector. HK$10 million a year is OK for a position with such importance, responsibility and visibility. For that kind of position, you also have to pay for status, loyalty and a level which deters the person from considering other job offers. If you can find the right person, you must at least match it with what he/she can get in the private sector. Yam is doing a pretty good job. Now all he has to do is to engineer a 10% devaluation/re-peg of the HK dollar over the next 24 months. (Sorry, but that is my best prescribe strategy going forward for HK). The so called paltry returns is necessary as you cannot and should not ask for returns that are more than 200-300 basis points than the prevailing interest rates (i.e. if the prevailing interest rates in 4%, the Funds should not target more than 5.5%-6% in returns). To go above that would automatically require the Fund to seek higher risks - not in the best interest of the Fund. The same mentality should prevail for any retirement / superannuation funds... be it CPF, EPF, 401k and when designing your own personal retirement fund portfolio.