Bonus Bonanzas Should End with Bailouts

The U.S. Treasury is spending some $700 billion or more in taxpayer funds to bail out scores of financial institutions that helped get us into this credit mess.

Now it turns out that a large chunk of this money may be going for executive bonuses. Where is the justice?

Elected officials including New York State Attorney General Andrew Cuomo and Rep. Henry Waxman are right to demand answers from these institutions about their plans to spend taxpayer money for bonuses, particularly since the government has taken big equity stakes in many of them.

"Taxpayers are, in many ways, now like shareholders of your company, and your firm has a responsibility to them," said Cuomo in a press release.

I totally agree. These banks should not be allowed to soak up federal funds and use the money to pay out large bonuses to those executives who got their banks into trouble to begin with through risky and ill-advised strategies.

While bonuses are often viewed as part of Wall Street compensation packages, executives should not be entitled to them if it can be proved that strategies they promoted failed, particularly at a time when shareholders and employees suffered as a result. It is time for the boards of directors of these banks to take a harder line on these payments.

Boards have a responsibility to shareholders – not just to senior managers. Rather than allowing managements be paid huge bonuses, they should make senior managements accountable for their performances.

Targeting egregious executive compensation on Wall Street and elsewhere, such as at Fannie Mae, Freddie Mac and AIG, is long overdue. I hope that these measures lead to lasting changes in how compensation packages are designed. It is extremely detrimental to our economy when executives bail out of their companies with millions of dollars in payouts for failed leadership.

There is some evidence that the tide is turning against executives who soak up egregious sums of compensation from institutions that stumble.

From 2006 to 2008, the number of Fortune 100 companies that have disclosed clawback policies has increased, according to executive compensation firm Equilar. But still more needs to be done. Clawback policies generally allow companies to seize compensation in the event of a financial restatement or ethical misconduct, according to Equilar, an executive compensation firm.

These days, we have seen much evidence that the seeds for many financial firms' recent stumbles were sown years before. And in many cases, it could have been avoided with prudent risk management policies. For instance, the AIG Financial Products division for years had been writing insurance policies on mortgage backed securities, known as credit default swaps. But it was only recently that these bonds began defaulting, leading to colossal losses for AIG which required a government takeover of the firm, backed with $120 billion in taxpayer dollars.

Faced with a legal challenge from the New York State Attorney General, AIG agreed last month to freeze any payments to former CEO Martin Sullivan’s $19 million employment contract. The AG also froze any payments out of a $600 million deferred compensation and bonus pool to AIG's Financial Products unit, including payments to Joseph Cassano who headed the unit and whose share was about $69 million, Cuomo said in a press release.

Regulators also said they are blocking multi-million dollar payouts to the CEOs of both Fannie Mae and Freddie Mac.

But there is clearly more to be done. National City Corp., the giant Midwest bank that stumbled badly from investments in subprime mortgages over the last year, paid its former CEO David Daberko a total of $64.8 million from 1991 to 2007 in salary, benefits and stock option payouts, according to Equilar.

It was Daberko who presided over the bank's aggressive push into subprime mortgages over the last half-dozen years which ultimately caused millions of dollars in losses, virtually forcing its sale to PNC Financial for a fire sale price this month, according to news reports.

And according to a recent shareholder lawsuit, Kerry Killinger, the CEO of the failed banking giant Washington Mutual, received over $33 million in total compensation, including at least $7 million in bonuses from 2005 to 2007 at a time when the bank was pushing forward into subprime lending that ultimately caused its demise.

Killinger, who was ousted by WaMu just weeks before the bank was seized by regulators in September, was entitled to a cash severance bonus of $16.5 million as part of his contract, SEC filings show. Should he receive this bonus for leading a bank that lost tens of billions of dollars in shareholder value along with the loss of thousands of jobs?

It is obvious that clawback provisions should be mandatory for all executive contracts these days in light of these debacles. Why should shareholders pay bonuses to executives who drove their institutions off cliffs?

Through my new advocacy initiative, United Shareholders of America, I am working to change laws to make executives more accountable for their performance or lack thereof. But it is only when large numbers join this cause that we will be empowered to change laws in Washington and state capitals that favor managements over shareholders, who are the true owners of corporations.

I am asking that you sign up for the campaign on my blog, the Icahn Report, www.IcahnReport.com. Put your name in the top right corner and join United Shareholders of America. It costs you nothing and may produce the changes we so desperately need.

Comments

[Virgil Bierschwale]

A good article.

I sometimes wonder why people have to go through disasterous times before they pull their head out of the sand and see what actually is happening around them.

I don't think you can do this on your site, but I have added a Wall of Shame to my web site at http://www.KeepAmericaAtWork.com where I am adding all companies that are sending their jobs offshore as this is killing the American economy and yes, I can back up the numbers.

Perhaps a Wall of Shame on this site showing the companies that do not work to build up the value of the share holders business by pursuing prudent profitable business plans.

Virgil
http://www.KeepAmericaAtWork.com

[JohnPiccolo]

Well said Carl! It seems dubious, however, that any immediate initiative will change this problem. It appears that the states of affairs in their totality are too much to be able to change short term, but I am with you for the long haul.

[Alex Vasilyonok]

"The U.S. Treasury is spending some $700 billion or more in taxpayer funds to bail out scores of financial institutions that helped get us into this credit mess.

Now it turns out that a large chunk of this money may be going for executive bonuses. Where is the justice?"

First of all, the whole $700 billion program was dumb. To have limits on executives compensation was as dumb, as the whole program.
US economy has many systemic problems. Compensation of executives is supposed to be defined by the owners of a company. Not by members of Congress. The Board Of Directors is supposed to represent the owners of a company,
i.e. stockholders. However, as a rule, The Board
Of Directors of the publicly traded companies,
represents the management. The managements may own a tiny fraction of a company, which they control. That is the reason for the obscene pay packages for executives. This pay has very little to do with performance. It has a lot to do with the absence of checks and balances.
Now, suppose, I own 100% of a company. It is impossible to imagine that, as the stock price
of the company nosedives, the executive I hired gets millions of $$ in compensation. However, this is a rule among publicly traded companies.
The reason for this nonsense is the transient nature of the ownership, i.e. stocks are traded
all the time. The transient partial owners of a
company may not be as interested in excercising the control. In the absence of interest from the
legitimate owners, the contol is usurped by the management. This is just a description of a systemic problem.

[TRAVIS L]

WE NEVER REALLY NEEDED THE BAILOUT, WE NEEDED LOWER MORTGAGE INTEREST RATES SO PEOPLE WILL START BUYING HOUSES, WE NEED CLEAR, SIGNED AND SEALED EARNINGS REPORTS FROM REGULAR TRADES AND CREDIT DEFAULT SWAPS (shortselling)

THE TOP OFFICIALS HAVE TOLD PEOPLE THAT THE REASON FOR WALLSTREET BAILOUT IS BECAUSE OF A MORTGAGE CRISIS THIS IS NOT THE ISSUE. THE REASON FOR BAILOUT IS BECAUSE A CREDIT FREEZE, THE BANKS INABILTIY TO LOAN MONEY AND IF LOANS ARE GIVEN THEY ARE GIVEN WITH HIGH INTEREST RATES. THE FLOW OF MONEY IS THE PROBLEM. SO TO GET LIQUIDITY ESTABLISHED AND PREVENT THIS FROM HAPPENING AGAIN I HAVE COME UP WITH A DETAILED PLAN:

1. COMPANIES AND ONLY COMPANIES WILL TAKE PART IN PROFITS FROM CREDIT DEFAULT SWAP TRANSACTIONS, BETTER KNOW AS SHORT SELLING.

2.COMPANIES WILL ESTABLISH A CAPITAL GOVERNANCE COMMITTEE (C.G.C.) WITHIN ITSELF OR HIRE A FIRM TO HANDLE ALL (C.D.S.) SHORT SELLING PROCEDURES AND PROFITS. THIS WILL BE A REQUIREMENT IN ORDER TO BE A PUBLIC TRADED COMPANY.

3. C.G.C. WILL REPORT ALL EARNINGS FROM SHORT SELLING TO S.E.C. ON A BI-MONTHLY BASIS ALONG WITH COMPANY EARNINGS TO DETERMINE CORRECT VALUE OF COMPANY AND ASSETS. REPORTS FROM C.D.S. AND REGULAR EARNINGS WILL BE SEPERATE, BUT GIVEN AT SAME TIME.

4.COMPANIES WILL SEE NO PROFITS DIRECTLY FROM (C.D.S.) SHORT SELLING TRADES. 50% OF PROFITS WILL GO DIRECTLY TO SHAREHOLDERS OR TO INCREASING VALUE OF SHARES. ANOTHER 20% WILL GO DIRECTLY TO A (S.B.F.) SELF BAILOUT ACCOUNT, THIS ACCOUNT WILL BE SIMILAR TO AN ESCROW ACCOUNT FOR COMPANY LOSS PREVENTION.

5.COMPANIES WILL THEN SERVE THEIR COUNTRY AND COUNTRYMEN PATRIOTICALLY BY DONATIONS 15% TO NATIONAL DEBT AND ANOTHER 15% TO AN EDUCATION OR HEALTHCARE FUND.

6.COMMITTEES WILL ENSURE THAT REDISTRIBUTION OF PROFITS FROM (C.D.S) SHORT SELLING ARE DIVIDED ACCORDINGLY. COMMITTEES WILL ALSO HOLD SHAREHOLDER MEETINGS TO DETERMINE WHETHER OR NOT SECURITY HOLDERS ARE SATISFIED WITH DISTRIBUTION OF PROFITS.

THIS BILL WAS CREATED TO GIVE INVESTORS ASSURANCE THAT THEY WILL PROFIT WHEN A COMPANY PROFITS - THE EXACT REASON WHY INVESTORS INVEST. THE (S.B.A.) SELF BAILOUT ACCOUNT IS FOR INSURANCE PURPOSES TO MAKE SURE COMPANIES AND SHAREHOLDERS DONT LOSE INVESTMENTS.BASICALLY TO PREVENT BUYOUTS, BAILOUTS OR BANKRUPTCY. THE 15% TO NATIONAL DEBT AND 15% TO EDUCATION OR HEALTHCARE FUNDS ARE A WAY FOR CONTRIBUTE TO ECONOMY.

COMMITTEES WILL ENSURE ALL PROFITS ARE DISTRIBUTED PROPERLY,RESPONSIBLY AND PATRIOTICALLY.

THIS IS MY PLAN

WILL IT WORK OR NOT?

SURE PEOPLE CAN INVEST IN "AMERICA" AS JIM KRAMER PUT IT. AMERICA MEANING FANNIE AND FREDDIE WITH DIVIDEND REINVESTMENT PLANS FOR THE NEXT TWO YEARS. CITIZENS HOMES SHOULD BE PAID OFF, THIS WAY MORE PEOPLE IN THE MARKET, CONFIDENCE TO BANKS AND LOANING ISSUES, PLUS NO BAILOUT JUST RECONDITIONING OF FINANCING).

[Steve]

Carl Thank you and Boone Pickens for trying to help this country. As an old shareholder and moderate, I think things will change. I'm on yours and Boone's teams and I think Washington will listen or we'll vote them out just like the company board members. To many good companies and jobs have been lost to the good old boy network of yes men and greed for me and screw shareholders and workers. I've seen this first hand and have been affected by it. Steve

[walter voelker]

I am all for making these changes which you want to enact Carl. We need to do this ASAP. Strike now while the outrage is great. But in all reality, there must be serious penalties for this "ethical misconduct" which is talked of. Not just fines but jail terms - heavy ones or there is no incentive by executives or boards to do the proper things. If Cuomo and Waxman are serious about this, they need to draft legislation right now and have our new president ready to push and force this enactment soon.
Let's not forget about all that compensation in these past years. It must be taken back and put back into these companies and the shareholders trusts.
THE FEW HAVE TAKEN THE WEALTH OF THE MASSES AND NOW MUST RETURN IT AND FACE THEIR PUNISHMENT.

[Robert]

The word bailout only confirms that we are sinking. After all the errors are in the economy and out of the thick skulls that created this mess the opportunities will abound. The time to position for the running of the bulls is now. I live around the corner from you in Florida but I am packing and moving to New York to seek my slice. I hope I find someone as astute and active as you to work with when I arrive.

[Don. W]

Here is my take on the year end bonuses. There shouldn't be any bonuses because of what has happened thus far in our financial industry. When I read this sec. i became very mad. The shareholders of these companies should be replaced. " The company goes down; and the CEO's leave with bonuses that will choke a horse. this shows the world that we have no accountability. Hopefully the new administration will require more transparency.

Don. W

[Ray]

The inequities created by Boards and accepted by CEOs and other executives continues.

I was just reading a story about the restoration of Rick Wagoner's (CEO-GM) pay back to the 2006 level after a one-year cut. His base pay for running a losing organization is $2.2 million while Frank Blake at Home Depot accepted $1.25 million contract to run a company that has not lost money despite a very tough market for them as well. (See pay story for GM at: http://blog.mlive.com/statewidebusinessstories/2008/03/gm_board_restores_ceo_rick_wag.html).

I am appalled that CEOs and other top execs are not taking pay cuts of 50% or more in the current economic environment. They should also ask rank and file employees to take 5, 15 or 15% pay cuts instead of laying off more workers that we all pay to do nothing. But I don't expect leadership from the current group of executives. If my proposal seems crazy consider that during the late eighties HP employees did take a 10% pay cut across the boards thereby avoiding any layoffs. The pay cuts lasted only a few months and the savings allowed everyone to not only keep their jobs but make up most of the cut on the next profit sharing check.

My point is that we are not seeing real leadership from executives who are certainly making real money. That MUST change. To everyone who reads this, please write at least one Investor Relations Department for a company you believe is rewarding mediocre performance or even worse.

One final point, I believe that when companies succeed, most of time more than fifty percent of the success can be seen as a reflection of the general economy. Success in a down economy is rare and executive compensation should take this into account.

[DomainDiva]

All the fuss about extravagant compensation. Why are shareholders not making a fuss over a CEOs' demonstrated leadership skills? True leaders are there for the team and the shareholders NOT their personal banking accounts.

[Kimberly S]

If we just let the bad companies fail, then the compensation would not be possible - bankruptcy court would handle this and the market's voice would be heard. However, the bailout and other such actions from the past serve to artificially bolster what is suppose to be free-market forces driving a company down due to poor performance. The system has been rigged for this sort of imbalance. I can't believe someone who says they are fighting against tyranny can't see this. LET THE COMPANIES FAIL, only then will the shareholders and boards wake up. There can't only be upside to the risk CEOs, other executives and investors take.

[tc in toronto]

Mr. Icahn,

Once again after reading your blog your executive insights and overdue ideas are what this market really needs.

I ask you this....In a business when ones work performs they are praised. When the worker fails they are corrected or removed.

Looking at Lehman Brothers and Mr. Fuld, or AIG or Fannie or Freddie, these tops executives did not deserve a "golden parachute" rather a kick in the backside and seize all their assets and money to be put back into the company in question.

Shareholders call the shots....in this case where were they? Why did Mr Fuld receive anything and why is he allowed safe passage while good people lost their jobs?
"GREED" is very much alive and Carl on fast money this past week in your spot with Dylan you made mention to this. I think the US government needs to control all EXECUTIVE caps and punish those that abuse it. After all the goal of a CEO or Chairman is to steer the ship into success with all their team!

Now 700 billion is in Mr. Paulsons hands....in his control....WHERE is the plan? WHAT is the plan? And WHY the HELL is he funding companies that ABUSE the emergency funds? IE. AIG and their SPA weekend or the recent GOLF extravaganza hosted by a large investment bank?

I continue to listen to you Carl on CNBC and read your blogs. You are a brillant man and true visionary and a leader.

Why are you not on President elect Obama's financial team? They are truly missing one of the greatest talents of all time....

Mr. Icahn....please for all of us do not give up on the battle of free markets and corrupted CEO's!

I wish you continued success and look forward to future posts.

All the best.
tc in toronto.

[eric sabety]

I think a lot of your points might be of interest to the Obama administration. Better corporate governance is the only answer. It is obvious that the shareholders of GM who have bailed out over the last decade had a better idea as to what cars needed to be built and what salaries needed to be paid and whether GMAC should have been in home mortgages than management. Corporations would likely benefit from better governance by the shareholders.

[NiftyNanaNancy]

Good Morning Carl:

Please comment on any advances made in getting your day on Capitol Hill. All this blogging is great, but we need action. How many people are current members of United Shareholders of America? Have you succeeded in scheduling a date to speak in front of a congressional committee? As a country we seem to have a terminal case of Attention Deficit Disorder. We must do something now.

[James Mansfield]

Dear Mr Icahn:

Re: a previous comment NiftyNanaNancy+

If you do get to go to Capitol Hill, be sure to mention that mismanagement of government programs by legislators, contractors and the like is causing problems beyond comprehension.

Although we have no evidence of 'golden-parachutes', the mismanagement of government (especially labor contracts and pensions at city, state and federal levels) is contributing to the fiscal calamity.

Some (Ed Koch, Arnold Schwarzeneggar) claim that union negotiators threaten managements and force them to go along with increasingly expensive labor deals, and by the looks of many budgets, it seems true!

Most government unions in the USA are hopelessly misguided (or act as if they are!) The two major reasons that unions were necessary were for worker protection and to obtain a fair share of the profits. Concerning the first, if government workers are fearful of their employers, they should vote them out of office just like the general public does or quit and move to another country! Second, if the government makes a profit, the profits should be returned to the people, not the workers, since in many cases the workers have already taken so much from the treasury(ies) and will continue taking for years to come in the form of pensions! (Besides, government agencies that face pending fiscal calamities on account of their untenable pension plans and labor contracts would do well to invoke Employee Retirement Income Security Act (ERISA), which has been utilized by private entities for the purpose of maintaining solvency in the event of strong-armed union tactics (Three interesting items here: 1) Ed Koch, former Mayor of NYC, compared that city’s labor negotiators to Ghengis Khan, which certainly makes the first reason above (worker protection) seem moot; 2) the appearance of gun-toting negotiators at a labor-negotiating session seems to substantiate the Koch analogy; but 3) the California Governor sometime ago seemed to downplay the threat by insisting that it was the CA state senate or assembly (girly-men?) who gave into union demands too easily.) Recently, Northwest Airlines mentioned its intent to outright void their labor contracts on account of near insolvency. Or was that Delta? Or General Motors?) (An associated note here would be that since unions in general put so much upward pressure on wages, the inflation it causes is a matter of National Security!)

To complete the picture, when was the last time you witnessed a government employee who was on the clock but seemed NOT to be working?

[Kathy F.]

We, the USA and the world, have been ENRONIZED.
Yes, we must look forward and move forward...and my major suggestion is...Carl and T. Boone...make all Government officials view the documentory -ENRON-The Smartest Guys in the Room "This, sober, informative chronicle of the biggest business scandal of the decade is INDECENTLY ENTERTAINING" A. O. Scott, The New York Times. Underwrite the viewing of this film on public TV, cable, Fox, HBO, ABC, CNN, etc. EDUCATE THE PUBLIC AND THE PUBLIC'S GOVERNMENTAL DECISION MAKERS...and leave them no excuse to say they did not know or blame others, including the public taxpayers.
Unfortunately, the film was a foreshadowing of what is now the largest international, financial debacle in history...and guess who was in the middle of it...The Bush aristocracy, the investment banks, the government, the lobbyists...oh sound familiar- those currently in charge of the "bailout." Unfortunately, history has repeated itself in a very short and exacerbated, grander scale than could have been believed. EDUCATE THE PUBLIC, OUR GOVERNMENT, OUR TAXPAYERS. SHOW THE MOVIE ON A GRAND SCALE!

[eso]

alert (“saludos”);

[Mike]

Wow, scary stuff going on. Banks get bailout dollars to pay christmas bonuses for the worst year in recorded history! Now the big 3, not any of the car makers who can turn a profit, want money too! Why? So the execs can pay themselves! They ran these companies into the ground. This is not about Bush. This is about high paid people who failed. They sat in big rooms, discussed how great they are and sank. They only learned how to spend. They cannot invest and make money anymore. The system has grinded to a halt.
Example: GM. Look at the Tahoe. Look at the Escalade. Look at the GMC Yukon or whatever they call it. Its 3 cars packaged with very subtle differences. The same car made 3 times. They need to reduce 66% of their brands and probably 66% of the workforce to turn a profit. Can you imagine BMW making a 5 series and a 5.1 series and a 5.2 series calling one a BMW, one a Cooper and the other a CoopMW... You'd laugh!!! Who buys 3 versions of the same exact car. Sorry for ranting!

[Cynical Synapse]

I agree 100%! If the bank is taking bailout money, it's not successful. Businesses not making a profit don't usually pay bonuses. Thus, the answer is to just say no!

[Matt]

Carl you appear to be a man with answers.Take this scenario, a company where the CEO receives compensation of $100+ Million and demands pop star treatment, refuses to travel or sleep with his luggage so has seperate vehicle and hotel room. Co share price drops more than 50% since launch on street. Expense cutting to the point where it impacts sales and development of core product. Replacement of experience with cheaper out of industry people in positions of critical importance.Typical American CEO attitude of Take care of Today's Share Price, someone else will have to worry about Tomorrow'.
Question; Fight or Flee.

[mich]

Executives shouldn't be entitled to bonuses no matter what. I'm a teacher, salary paid by taxpayer dollars, and bonuses for teachers are unheard of. We deserve bonuses more than any exec, but that's another story. Under no circumstance should anyone receiving even a penny of taxpayer dollars receive a bonus. It shouldn't matter "if it can be proved that strategies they promoted failed". They shouldn't get them at all. Execs also shouldn't get their ridiculous salaries. They don't "earn" them and they certainly don't deserve them. I think ALL these execs should be taught a lesson and paid a teacher's salary.