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Banking on bonuses

Bankers at Goldman Sachs Group had a tumultuous 2012. The firm cut 900 jobs, promoted the fewest executives to the exalted post of partner in more than a decade and slashed the portion of revenue set aside for compensation to 38 per cent from 42 per cent a year earlier.

For the man at the very top of Goldman Sachs’ pay pyramid, chief executive officer Lloyd Blankfein, 2012 was his finest year since the boom times of 2007. Blankfein, 58, was awarded US$26 million (HK$201.85 million) for his work last year, lifting him to the top in the Bloomberg Markets ranking of the best-paid CEOs at North America’s 20 largest financial companies by customer deposits.

John Stumpf, who led Wells Fargo to a record profit of US$18.9 billion, ran a distant second, at US$19.3 million, according to a Bloomberg Markets magazine report preview.

The pay of the 20 chiefs increased an average of 7.7 per cent for 2012 compared with a year earlier, according to data compiled by Bloomberg. The tally is based on salaries, stock, bonuses and long-term incentive pay awarded to the CEOs for 2012.

“All of them are being overpaid,” says Eleanor Bloxham, CEO of Value Alliance, a board advisory firm in Westerville, Ohio. “The bank boards still don’t have a good handle on how they should be compensating their executives.”

Bloxham says directors lean too much on share performance and instead should look at how CEOs manage risk, including capital ratios that measure financial strength.

The 2010 Dodd-Frank Act gave shareholders a nonbinding vote over compensation, spurring them to examine more closely whether CEO pay is in line with results. In a second ranking, Bloomberg Markets compared the awards and performance of each of the 20 chiefs to determine who was the most overcompensated and undercompensated.

First, it ranked the 20 banks on each of three different measures to assess their results and size as of the end of each company’s 2012 fiscal year: total stock performance, return on common equity and assets, including cash and investments.

It included assets, a key measure of a firm’s size, to reflect the additional challenge at giant global companies of achieving positive results compared with doing so at smaller banks that operate mainly in the US or Canada.

Then, the magazine calculated the average of the share performance, ROE and asset scores for each bank to establish an average rank for them. Finally, it subtracted each CEO’s compensation standing from his or her bank’s average rank. The chief with the biggest difference between the two rankings would be the most overcompensated.

Richard Fairbank, CEO of Virginia-based Capital One Financial Corp, was the most overpaid leader. Fairbank, 62, earned US$17.5 million while steering a firm whose deposits almost doubled from 2008 to 2012. Blankfein was the second-most overpaid, and Stumpf took the third spot.

After the Wall Street crash of 2008, lawmakers expressed outrage over lavish paycheques given to bankers. As the Troubled Asset Relief Program handed out US$419 billion in bailouts, directors initially showed restraint. Humbled chiefs relinquished their bonuses. Blankfein took home a total of US$600,000 in 2008, after hauling in US$68.5 million – an investment bank record – in 2007.

By 2009, big paydays started to return, with New York-based JPMorgan Chase CEO Jamie Dimon receiving US$15.2 million, compared with US$1 million for 2008. Blankfein topped Dimon in 2010, earning US$25.6 million, only to surrender the pay title back to him the next year. As the stock returns of the six biggest banks plunged in 2011, Blankfein and other chiefs took pay cuts.

“We strongly believe in linking executive pay to performance, and the variability of executive pay at the company over the past few years is a testament to that,” Goldman Sachs spokesman David Wells said in an e-mail. “We believe that our own framework for linking pay to performance provides a more reliable and thoughtful reflection of how best to compensate senior leaders than the methodology used for this exercise.”

Last year, Wells Fargo, the leading US home lender, grabbed a bigger share of the mortgage market, helping Stumpf, 59, net a 7.8 per cent pay raise. Wells Fargo spokeswoman Bridget Braxton said in an e-mail that the San Francisco-based bank’s compensation is competitive and rewards long-term risk management.

Matt McCormick, who helps oversee US$9.3 billion in assets, including Wells Fargo shares, at Cincinnati-based Bahl & Gaynor, says Stumpf’s pay makes sense. “Wells Fargo is one of the dominant – if not the dominant – mortgage machines out there.”

The say-on-pay provision of Dodd-Frank has given shareholders a modicum of influence over compensation. Although they have approved most pay plans, investors in Citigroup rebelled over the mooted US$15 million deal for then-CEO Vikram Pandit.

In April 2012, shareholders, who had seen a 92 per cent decline in the stock’s price under Pandit’s five-year reign, rejected the bank’s compensation proposal. In October, the board ousted Pandit after the New York-based firm failed to secure Federal Reserve approval to raise its shareholder payouts and Moody’s Investors Service cut its credit rating two levels.

Citigroup’s board appointed Michael Corbat, 53, in October to replace Pandit as its chief. Directors tethered US$3.14 million of his total US$11.5 million in pay for 2012 to achieving long- term financial goals. Shareholders approved the plan in April.

“Before, there was a tremendous amount of discretion and flexibility in how banks paid executives,” says Joseph Sorrentino, a managing director at Steven Hall & Partners, a New York-based compensation consulting firm. “Now, there is a trend of banks aligning with shareholder interests, making sure CEOs have significant skin in the game.”

Directors are showing more willingness to penalise the poor performance of their CEOs. Dimon, 57, had his 2012 compensation cut in half to US$11.5 million after JPMorgan Chase traders in London lost more than US$6.2 billion on a wrong-way bet on credit derivatives. A March report by the Senate Permanent Subcommittee on Investigations said JPMorgan Chase dodged regulators and filed misleading information with authorities as losses escalated on the massive wager.

Fairbank, the third-highest-paid CEO, had the biggest gulf between his compensation and his firm’s average ranking.

Capital One’s stock return of 37.5 per cent hit the fifth spot in Bloomberg Markets magazine’s tally. North Carolina-based Bank of America Corp was tops, with a 109.8 per cent increase. Capital One’s return on equity of 9.9 per cent ranked 14th, well behind the leading 24.9 per cent ROE of Montreal-based National Bank of Canada. And Capital One’s US$313 billion in assets was 12th, a fraction of the US$2.36 trillion in assets at JPMorgan Chase, the biggest firm on the list.

Fairbank was the most overcompensated leader, even after taking an 8.9 per cent pay cut for 2012. Capital One spokeswoman Julie Rakes says that for the 16th year, Fairbank received no salary and his compensation was based on stock and tied to the company’s performance.

Last year, New York-based Goldman Sachs posted its first revenue gain in three years as Blankfein navigated an industry slowdown in equities trading and dealmaking. The bank’s own bets through its investing and lending unit, which included stocks, debt and real estate, rose in value, adding to the top line.

Goldman awarded Blankfein with a 73.3 per cent pay hike, the biggest increase among the CEOs. His bank, the fourth largest by assets, posted a 43.4 per cent stock return, also the fourth highest, and a 10.7 per cent ROE, placing 11th. The average of these three rankings – 6.3 – was Goldman’s average score. When Blankfein’s top pay ranking was subtracted from 6.3, the difference – 5.3 – was the second biggest on the list, making him the second-most-overpaid chief.

Blankfein’s package includes a US$5 million incentive that will be paid out in three years if the firm achieves certain targets. The award can change depending on whether the company achieves a 10 per cent average return on equity and 7 per cent average increase in book value per share. The company’s board doesn’t include the long-term incentive plan, which began three years ago, in its own breakdown of annual executive pay.

In setting the CEO’s pay, Goldman Sachs’s compensation committee considered Blankfein’s deep understanding of the strategic aspects of all of the bank’s major businesses, according to a regulatory filing.

Anton Schutz, president of New York-based Mendon Capital Advisors, says he’s not surprised that Blankfein was the highest-paid CEO last year.

“He was at the helm during the crisis, so I don’t think he’s being paid just for last year,” says Schutz, whose firm has about US$150 million under management, including Goldman Sachs shares. “He’s being paid for bringing Goldman back. And Goldman is back.”

Blankfein told Bloomberg TV in February that he was not satisfied with the bank’s profit performance in 2012. The CEO said he and his managers still have a lot of work to do. Asked if he plans to leave Goldman Sachs after almost seven years leading the firm, Blankfein was emphatic.

“Could you imagine giving up all this? Of course not,” he said. “The combination of this being who I am and what I do and having absolutely no other interests makes me think I’m going to be doing this for a while.”

For the rankings, Bloomberg Markets magazine limited its universe to the CEOs of North American banks, brokerages and consumer finance firms as identified by Bloomberg’s industry classification system. The chiefs ranked represent firms with the largest customer deposits, including customer payables, as of the end of the 2012 fiscal year. Citigroup was excluded because its current CEO hadn’t served for all of his firm’s fiscal 2012.

For the total compensation ranking, the magazine included salary, stock grants and bonuses awarded to each executive for fiscal 2012. That figure encompasses restricted stock units, options, deferred cash, performance-based awards and all nominal long-term incentives that were determined to correlate to the year’s performance.

US-based company pay was compiled using data reported to the US Securities and Exchange Commission in each firm’s annual proxy statements for the fiscal year ended on December 31 2012. Pay for CEOs of Canadian firms was compiled using data reported to the Canadian Securities Administrators in each company’s annual proxy statement for its fiscal year ended on October 31. Canadian compensation data were converted to US dollars using the October 31 2012, exchange rate.

For the overpaid and underpaid CEO lists, the magazine ranked the companies on each of three measures as of the end of fiscal 2012: total stock return, return on common equity (which includes accounting charges) and assets. It took assets into account because of the relative difficulty at large global firms of achieving positive results compared with doing so at smaller and more-focused regional companies.

Then it took the average of the three rankings for each firm. Finally, the magazine subtracted each CEO’s total compensation rank from his or her firm’s average position, and the chief with the biggest difference between the two rankings was the most overpaid; the leader with the smallest difference was the most underpaid. All pay figures were rounded to the nearest US$100,000. Bloomberg