Executive Compensation

Last Thursday, Special Master Kenneth Feinberg (the so-called "Pay Czar") released his determinations as to the executive compensation packages for 175 senior employees working for the seven largest companies receiving extraordinary financial assistance through TARP (just moments after I clicked the "publish" button on Thursday's Blog, observing that all reports on the Special Master's determination were merely speculation).  As I commented last week, I am 100% against the government regulating executive compensation, but these companies are either largely owned by the government, or were saved from insolvency by the government – so the government (read: taxpayers) is a shareholder and shareholders should have input on pay.

However, one aspect of the Special Master's process troubled me.By his own account, the Special Master did not consult one person in the private sector (i.e., those of us actually working with executive compensation issues on a daily basis in the real world, as opposed to pondering them in the abstract).  The professors with whom he consulted are brilliant people no doubt, but I wonder whether any of them have actually attended a Compensation Committee meeting or negotiated an employment agreement?

As expected, the biggest cut will be to cash salaries, which will drop by 90% on average. Kenneth Feinberg, the Treasury Department's special master for compensation, is expected to issue his determinations today. Looking specifically at the Pay Czar’s response to Citigroup’s 2009 compensation submission for SEOs and other highly compensated employees, Mr. Feinberg rejected and amended each of Citigroup’s suggestions as either inconsistent with the purpose of EESA section 111 or because the compensation structures were otherwise "contrary to the public interest."

* Cash Salary – Citigroup proposed keeping the CEO’s salary at $1 and generally increasing cash salaries up to $800,000 per year for the other employees, based on the compensation of comparable employees at comparable financial institutions.

Mr. Feinberg capped these employees’ salaries at $500,000, citing a target of the 50th percentile of similarly situated employees in similar organizations.

* Stock Salary – Citigroup proposed vested stock grants in the annualized amount of $2,311,667 - $5,525,000, a third of which would be transferable upon grant, a third transferable one year after grant and a third transferable two years after the grant.

Mr. Feinberg reduced the stock salary amounts and changed the transferability dates to one third of the total amount each year beginning on the second anniversary of the grant date.  This deferment is meant to align incentives with long-term value creation rather than short-term profits.

* Annual Long-Term Incentive Awards – Citigroup proposed discretionary incentive awards ranging from $1,393,333 to $3,000,000 in the form of restricted Citigroup stock that would vest two years from the grant date if the employee remained with the company.

Mr. Feinberg changed the waiting period to three years based on recently adopted international standards for incentive compensation and required Citigroup to develop specific, objective performance criteria, subject to agreement by Feinberg's Office, from which to grant awards, rather than allow Citigroup to use their discretion.  Further, the awards may only be redeemed in 25% installments for each 25% of Citigroup’s TARP obligations that are repaid.

* “Other” Compensation and Perquisites – Citigroup proposed various other forms of compensation for personal expenses.

Mr. Feinberg generally disapproved of the company paying for personal expenses and allowed no more than $25,000 in such expenses for each employee, unless the employee provides special justification to the satisfaction of the Office of the Special Master for exceeding this amount.

* Supplemental Executive Retirement Plans and Non-Qualified Deferred Compensation – Citigroup proposed that some employees receive compensation in this form.

Mr. Feinberg prohibited further accruals of such deferred compensation because such payments were not performance-based and made it difficult for shareholders to easily comprehend the full amount of employees’ pay.

* Severance Plans – Citigroup proposed that some employees’ severance agreements be increased.

Mr. Feinberg prohibited any increases in the amounts payable under severance agreements because such increases would not be performance-based.