Navigating Governance: Tackling the Executive Compensation Issue

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Second of two articles

The focus on corporate governance has rekindled investor activism on a related topic: executive compensation.

Many financial services firms, perhaps anticipating potential criticism, lowered cash pay and withheld bonuses for last year.

Still, several banks' chief executives got big stock option grants or "performance-based" awards of restricted shares. They included Wells Fargo & Co.'s Richard M. Kovacevich and Bank of America Corp.'s Kenneth D. Lewis, who were among the 10 highest-paid CEOs of S&P 500 companies, according to the Corporate Library, a Portland, Maine, research firm that focuses on governance issues. (See table on page 11.)

Both Wells and Bank of America, however, put up solid numbers last year.

The total direct compensation for CEOs fell at 20 of the 22 largest financial services firms in a survey conducted by American Banker. Proxy materials from the 22 companies yielded one case in which compensation rose while return on equity fell. The executive, MBNA Corp.'s Charles Cawley, had held a lower position in the organization the year before.

Mr. Lewis was one of two executives whose total compensation climbed while his company's return on equity increased. His pay rose 16.2%, to more than $20 million in cash, stock, and stock options, according to data compiled by Executive Compensation Advisory Services. Bank of America shares climbed 10.50%, and its ROE was 19.44%. Joseph Saunders, the CEO of Providian Financial, got a 60% raise. Providian's return on equity was 8.9% and its stock rose 82%.

Historically, commercial bankers have not been paid as well as their counterparts at investment banking firms, possibly because the lending business "was not as complicated" -- and heavily regulated banks did not have room for complexity, said Alan Johnson, an executive recruiter and compensation consultant specializing in the financial services industry at Johnson Associates in New York. Commercial bankers enjoyed certain benefits, however -- pensions being one, he said.

The lower pay scales of commercial bankers changed in the last decade as bigger companies elbowed into investment banking. Executives began getting options and other long-term stock-based incentives. Many banks instituted option programs for a broad swath of their employees. Last year restricted stock replaced options in many CEOs' pay arrangements, a trend that many expect will continue now that options are being expensed and appear to be less attractive than they once were.

Critics were not without their targets.

The two biggest banks, Citigroup Inc. and J.P. Morgan Chase & Co., were among the Corporate Library's 10 worst firms last year in terms of measuring CEO pay as it relates to performance.

Sanford I. Weill, Citi's chairman and CEO, got a 70% cut in his total direct compensation, to $8.8 million. His cash pay fell 94%, mostly because he gave up a bonus estimated at $17 million. Citi's stock, battered by a rocky year for earnings and negative headlines about its investment banking activities, slid 31%. Its return on equity was 18.60%.

But, the Corporate Library points out, Mr. Weill received a new option grant worth an estimated $15 million and realized stock option gains of an additional $11.8 million. Meanwhile, Citi, at the center of last year's maelstrom over investment banking conflicts, paid the biggest fine of any Wall Street firm in the $1.4 billion global settlement with regulators.

Last year J.P. Morgan Chase was also in the middle of the investigations into the collapse of Enron Corp. and it struggled with a poor environment for private equity, corporate lending, and trading. Chairman William B. Harrison Jr.'s direct pay fell 58%, to $9 million (not including a $5 million bonus related to Chase Manhattan Corp.'s 2000 purchase of J.P. Morgan & Co.), and his cash pay was 63% lighter. …