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Shareholder discussion: Deferred Bank Executive Bonuses

OK, we're all shareholders now in some large banks (through the US Treasury investment).  As a shareholder, what do you think of the article in today's Wall Street Journal (subscription required, excerpts below) on the more than $40B owed to executives at these banks for prior years pay and pensions?

The article opens with:

Financial giants getting injections of federal cash owed their executives more than $40 billion for past years' pay and pensions as of the end of 2007, a Wall Street Journal analysis shows.

The government is seeking to rein in executive pay at banks getting federal money, and a leading congressman and a state official have demanded that some of them make clear how much they intend to pay in bonuses this year.

But overlooked in these efforts is the total size of debts that financial firms receiving taxpayer assistance previously incurred to their executives, which at some firms exceed what they owe in pensions to their entire work forces.

The sums are mostly for special executive pensions and deferred compensation, including bonuses, for prior years. Because the liabilities include stock, they are subject to market fluctuation. Given the stock-market decline of this year, some may have fallen substantially.

Some examples: $11.8 billion at Goldman Sachs Group Inc., $8.5 billion at J.P. Morgan Chase & Co., and $10 billion to $12 billion at Morgan Stanley.

Few firms report the size of these debts to their executives. (Goldman is an exception.) In most cases, the Journal calculated them by extrapolating from figures that the firms do have to disclose.

Most firms haven't set aside cash or stock for these IOUs. They are a drag on current earnings and when the executives depart, employers have to pay them out of corporate coffers.

The practice of incurring corporate IOUs for executives' pensions and past pay is perfectly legal and is common in big business, not limited to financial firms. But liabilities grew especially high in the financial industry, with its tradition of lavish pay.

Deferring compensation appeals both to employers, which save cash in the near term, and to executives, who delay taxes and see their deferred-pay accounts grow, sometimes aided by matching contributions. In some cases, firms give top executives high guaranteed returns on these accounts.

The liabilities are an essentially hidden obligation. Even when the debts to their executives total in the billions, most companies lump them into "other liabilities"; only a few then identify amounts attributable to deferred pay.

The article describes how they estimated these amounts and that sources confirmed their calculations (but not on the record).  These are big numbers, but they aren't all payable in one year.  However, the obligations seem to be generally unfunded on the banks balance sheet, unlike their 'rank and file' pension obligations:

Obligations for executive pay are large for a number of reasons. Even as companies have complained about the cost of retiree benefits, they have been awarding larger pay and pensions to executives. At Goldman, for example, the $11.8 billion obligation primarily for deferred executive compensation dwarfed the liability for its broad-based pension plan for all employees. That was just $399 million, and fully funded with set-aside assets.

The deferred-compensation programs for executives are like 401(k) plans on steroids. They create hypothetical "accounts" into which executives can defer salaries, bonuses and restricted stock awards. For top officers, employers often enhance the deferred pay with matching contributions, and even assign an interest rate at which the hypothetical account grows.

Often, it is a generous rate. At Freddie Mac, executives earned 9.25% on their deferred-pay accounts in 2007, regulatory filings show -- a better deal than regular employees of the mortgage buyer could get in a 401(k). Since all this money is tax-deferred, the Treasury, and by extension the U.S. taxpayer, subsidizes the accounts.

Although the banks who have taken the US Treasury investment have agreed to limit executive golden parachutes in the future and have lowering the deductibility of high executive salaries, none of these rules apply to past obligations.  So, fellow shareholders, do you want your money being used to pay these past obligations that aren't reflected on the balance sheets of these banks?  I don't.

I think we (ok, Congress) should order the companies to put a moratorium on any deferred compensation payments to executives while the US Treasury is a shareholder.  They should also be forced to reflect these obligations on their balance sheets, lowering their short term profitability.  Of course, they are also welcome to renegotiate these obligations in order to lower them in the future.

Once the US Treasury is no longer a shareholder, their Boards can decide what to do with this deferred compensation.  But, in no way should they be able to avoid reflecting the costs of these deferred compensation plans on their balance sheets.  And, accounting rules should be clarified to make sure that they are required to disclose this in the future.

I've got no problem with high executive compensation, particularly for a company which performs well.  But, in public companies, that compensation needs to be clearly disclosed, including any deferred commitments.  If it can stand public and shareholder scrutiny, it's OK with me.


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