AFL-CIO's New Executive PayWatch Website Shows How CEO Pay Packages Helped Create Mortgage Crisis
April 14, 2008
Website Includes Brand New CEO Pay Numbers

www.paywatch.org

Compensation schemes for top executives at financial companies helped create the sub-prime mortgage crisis, the new Executive PayWatch website (www.paywatch.org) launched today by the AFL-CIO reveals. The 2008 PayWatch site also unveils a comprehensive database of brand new CEO pay figures.

“This year’s site drives home how outrageous CEO pay isn’t just a moral issue for America’s working people -- it’s a financial one, too,” AFL-CIO Secretary-Treasurer Richard Trumka said. “When CEOs are paid obscene amounts to make bad decisions, it hurts average Americans who hold mortgages, have bank accounts and who are invested, such as through their pensions.”

Through seven case studies, the 2008 AFL-CIO PayWatch site shows how compensation packages create incentives for CEOs to gamble on risky ventures in hopes they will lead to short-term increases in stock prices, but at the expense of the long-term future of their companies and shareholders.

Another problem, Trumka noted, is that CEO pay packages are often linked to performance measures such as revenue growth, or return on equity, that don’t take into account the risk taken on by the company.

The Bear Stearns Companies Inc. (BSC) case study shows how CEO James Cayne received a $17 million bonus, $14.8 million in restricted stock, $1.7 million in stock options, and over $6.1 million in other compensation.. The compensation committee determined the size of the 2006 executive bonus pool based on Bear Stearns’ after tax return on equity. In March, Bear Stearns narrowly avoided bankruptcy only to be bought for a fraction of its previous stock market price.

* The Countrywide Financial Corp. (CFC) case study shows how at mortgage lender Countrywide, executives got stock options which rewarded them for short-term stock performance even while they pushed lending practices that were not sustainable over the long run. During the height of the real estate bubble between 2004 and 2007, Chairman and Chief Executive Officer Angelo Mozilo cashed in on these short-term gains by exercising stock options valued at $414 million, prompting an informal SEC investigation into the sales.[1] As a result, he had already pocketed a tidy profit by the time the long-term consequences of his decisions finally caught up with the company’s share price.

* The Citigroup (C) case study details how Charles O. Prince resigned as chairman and chief executive officer of Citigroup last November, after accepting responsibility for the bank’s $5.9 billion write-down related to its exposure to risky mortgages. Upon departure, the board allowed him to retire, rather than firing him, and thus let him retain more than $28 million in unvested stock and options that became vested immediately.[2] He also received pension and retirements benefits with a present value of $1.8 million.

* The Merrill Lynch & Co. Inc. (MER) case study shows that CEO E. Stanley O’Neal, lost his job after the firm posted a $2.24 billion third-quarter loss. Despite the company’s huge losses, he left with stock options, unvested shares, deferred compensation and pension payments worth more than $160 million. A look at Merrill Lynch’s proxy statements over O’Neal’s tenure as CEO shows that his compensation was not tied to risk-adjusted performance measures. Instead, it was driven by revenue, earnings growth, and return on equity.

* The Morgan Stanley Inc. (MS) case study shows that John J. Mack, chairman and chief executive officer of Morgan Stanley, received $41.7 million in compensation in 2007 – including stock awards valued at $40.1 million - despite the prestigious Wall Street firm’s reporting the first loss in its 72-year history that year. Mack pushed his firm to take more risk and bet more of its own money on big trades and investments, a strategy that prompted the company to dive deeply into sub-prime mortgages, leveraged loans and derivatives and which backfired badly.

* The Wachovia Corporation (WB) case study shows how the company’s executive compensation plan rewards CEOs for revenue growth that results from mergers and acquisitions. As a result, Wachovia’s executives had financial incentives to pursue acquisitions to grow their companies even if the resulting transactions are risky or poorly conceived. One such acquisition, mortgage lender Golden West Financial, led to a deteriorating loan portfolio that required an increase in its loan-loss provision to $1.5 billion.

*The Washington Mutual Inc. (WM) case study details the performance measures of its 2008 bonus plan for top executives including CEO Kerry Killinger. Killinger was the architect of risky lending strategies that led to a more than 70 percent decline in stock value last year. Yet Killinger will get a bonus in 2008 based on measures that exclude the effects of loan loss provisions and expenses related to foreclosed real estate assets.

“You’ve got to wonder: What could the directors of these companies be thinking?” Trumka said. “Is it possible that they truly believe their CEOs to be so selfless? More likely, they just weren’t paying attention. And in failing to do their duty, they played a key role in creating the subprime mortgage mess that is turning the American Dream into a nightmare for millions of working people.”

In the coming weeks and months, Congress will address the foreclosure crisis through hearings on legislative solutions.

This year’s PayWatch also helps workers and homeowners make their voices heard on this issue. The site provides a letter that visitors to the website can send to their representatives in Congress calling for them to support legislation that includes:

. An immediate short-term moratorium on home foreclosures.
. A conversion of the low, ”teaser” interest rates on home loans to the
standard 30- year fixed mortgage.
. Expanding Chapter 13 bankruptcy court protection to enable
homeowners to shield their primary residences from foreclosures.

“If the government can see the need to buttress the financial system by facilitating and insuring a transaction between large corporations as it did earlier this year when JP Morgan purchased Bear Stearns, surely lawmakers can enact legislation to help the millions of homeowners who are suffering the most from the collapse of the housing market,” the letter says.

The AFL-CIO launched the Executive PayWatch website in 1997 to draw attention to runaway CEO pay packages and the widening gap between the compensation of corporate chieftains and workers. In 1980, CEOs of large U.S. companies made 42 times the wages of the average worker; by 2006 the gap had widened to more than 364 times.

11 Bear Stearns proxy statement filed with the SEC on March 27, 2007.

[1] Countrywide Seeks Rescue Deal, Wall Street Journal, January 11, 2008.
[2] Memorandum from Rep. Henry A. Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee, March 6, 2008 ahead of March 7,2008 hearings on “CEO Pay and the Mortgage Crisis.”
[3] Citigroup 2008 Proxy.

See: www.paywatch.org