According to a Wall Street Journal analysis, the sharp cuts in total compensation announced by Treasury Department pay czar Kenneth Feinberg, including firms Citigroup Inc. (C) and Bank of America Corp. (BAC), show how implementing regulatory guidelines on companies that received bailout packages may not be an easy sell on Main Street or Capitol Hill.
While total compensation was cut in half, The Wall Street Journal reported that regular salaries were substantially increased. On average, base salaries are expected to climb 14%, up to $437,896 compared with $383,409.
By “building the base”, the Treasury is acknowledging the arguments made by these firms. Top executives claim that an increase in annual salaries is needed to retain key talent.
According to the Journal’s analysis, Citigroup saw the largest increase in annual base salaries, an 87.4% increase. Bank of America will see a 7.5% increase.
However, while specific information regarding base salaries was not easily discernible, Mr. Feinberg did say he was imposing a $500,000 ceiling on base salaries and had rejected “cash guarantees that separate pay from performance.”
Another key element to Mr. Feinberg’s review was a reduction in the range of guaranteed payments and a shift into “salary stock” that requires a four-year vesting period to discourage short-term risk-taking.
While Government officials were quick to say that Mr. Feinberg achieved his overall goal of reducing a range of guaranteed payments and discouraging risk-taking, some pay experts disagree.
“I don’t think it’s a good thing,” said Russell Miller, managing director with ClearBridge Compensation Group LLC in New York. “Politically, it’s odd. In terms of messaging, it’s odd. From a business perspective, I prefer to align compensation with performance objectives and not a fixed rate.”
And Mark Reilly, a partner at 3C-Compensation Consulting Consortium, a Chicago pay consultancy, said the move “deepens the confusion and skepticism” surrounding the types of pay systems the government is promoting. “There’s no rational explanation to what they’ve done.”
On Capitol Hill, lawmakers preparing to hear Mr. Feinberg’s testimony before the House Government and Oversight Committee on Wednesday were divided at the appropriateness of the increase in base salaries.
One source of confusion may stem from comments made by Mr. Feinberg on National Public Radio. In an interview the day he unveiled his changes, he stated, “One of the critical aspects of what I tried to do was to vastly diminish the amount of guaranteed cash salary that would be paid these top officials.”
Many critics assumed that Mr. Feinberg was speaking of base salaries, when in fact he meant the range of compensation made to employees including base pay, bonuses, and other incentive payouts.
In addition to Citigroup and Bank of America, the other firms included in Mr. Feinberg’s review were Chrysler Financial, General Motors, GMAC, AIG and Chrysler Group. Only AIG and Chrysler Group showed a negative change in annual base salary.