Congress is sending a bill to President Obama's desk that limits banker pay. Specifically 11 pages in the 1,073-page $787 billion stimulus bill describe a provision that limits bonuses for executives at all financial institutions getting government money to a maximum of a third of their salary. And these are not cash bonuses -- instead they'll be paid in company stock that executives can't sell until the government investment has been repaid.
Citigroup (NYSE: C) CEO Vikram Pandit, volunteered to take a $1 salary until his company returns to profitability. Assuming Citi posts a loss in 2009, Pandit's maximum bonus for the year will be 33 cents -- which at today's price would amount to a tenth of a share of Citi stock.
This raises some questions in my mind:
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Can banks find a loophole to get around this "problem"?
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Will bankers below the top ranks still be able to use taxpayer money to pay themselves multimillion cash bonuses?
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Will banks pay back the government money to get out from under the pay cap?
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Why would anyone want to be a bank CEO under these conditions?
The answers are Yes, Yes, Yes, and I have no idea. Let me explain. I think banks will pay CEOs bigger salaries so they can get the big bonuses that they have come to expect. Banks will argue that they need to pay big cash bonuses to retain their top performers and government money will cover the cost. Any bank that can will scramble to pay back the government money as soon as possible. And there is no reason I can think of for why anyone would want to run a bank under these circumstances.
As I've posted, I think it is a waste of money to put government funds into banks that can't lend it out because they're too crippled with toxic waste to lend it. We should also create new banks and let the FDIC buy bad mortgages out of the toxic waste that weighs down the banks. If that process leaves banks that still can't pay back the government money, then they should enter a carefully planned process of liquidation so as not to cripple the financial markets the way Lehman Brothers' sudden bankruptcy did.
These pay limitations may score some political points but they don't do much to address the fundamental problems facing the financial system.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares.
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Reader Comments (Page 1 of 1)
2-14-2009 @ 11:36AM
Eric W said...
I agree with just about every you point you make in this piece. However, I am shocked that you own Citi shares. Citi is probably not going to make it. The firm is just being propped up until the government can figure a way to isolate the core bank utility functions of Citibank from the toxic waste and broker dealer activity.
2-14-2009 @ 11:41AM
Bobby said...
With all due respect, I've heard your argument over & over in simplistic fashion. Here's the deal.
If we let these banks fail, who will manage all the toxic or otherwise assets they have on their sheets?
When you say fail, do you mean "restructure" or just simply fade into the night? Wipe out shareholders & let weeds grow in the street? What would that do to all bank shares if they allow this to openly happen to one again? You'll see the market sell off another 2000 pts & exacerbate this problem tenfold.
Either way,, eventually there's going to be a total breakdown of "I can't do this anymore" for pennies when I used to be "master of the universe".
No more perks,, no more outrageous salaries,, back to square root of your last question,, "who in their right mind would see all of this through"?
It may not be popular,, but these banks need to be saved if possible for if for no other reason, to leave the infrastructure & overall structure in place as we know it today.
Without that,, this problem will arise at a later date even after we feel it's resolved.. Noone of that stature works for nothing..... Noone.....
2-20-2009 @ 5:48PM
Allen said...
I totally disagree with Bobby - if a bank is failing, it should be allowed to fail. As for bonuses and high salaries being necessary to retain top talent, I would submit that the so-called "talent" at the banks today are to blame for the crisis, so their departure should be welcomed....nay, encouraged, without generous severence packages or bonuses - perhaps, given their dismal performance,they should be given negative bonuses i.e. required to make restitution to their employer for their failures on a basis similar to their past pay and bonuses e.g. there would be some laggarsd who would be required to repay their employer 2-300% of their salary! What a wonderful thought!
2-20-2009 @ 5:50PM
Allen said...
One quick additional observation:
Vikram Pandit has no business being CEO of Citibank - he is woefully unqualified for the position! His $1.00 salary is grossly excessive.