The Pay Czar's Pay Cut Ruling: The Hype, the Hoax

The White House pay czar isn't reforming Wall Street. He's cutting deals with it. We need to understand the difference.

Responsible people can do reckless things, most often when emotion clouds their better judgment — and no emotion probably clouds judgment any more regularly than greed. Wave enough dollars in our faces, and we’ll be tempted to do what we shouldn’t.

Over recent years, to grab those waving dollars, America’s top execs and bankers have done plenty of what they shouldn’t. In the process, they crashed the economy.

So how best to fix the economy — and prevent more crashing? Stands to reason we ought to curb the rewards that create all those incentives for reckless behavior, right?

[1]At first glance, the pay plan that White House “pay czar” Kenneth Feinberg unveiled last week seems to do that curbing. “U.S. to Order Steep Pay Cuts at Firms That Got Most Aid,” read [2] one early headline on Feinberg’s plan. “U.S. takes aim at executive pay,” read [3] another.

Headlines like these undoubtedly brought cheer to White House PR types. The reality behind those headlines, unfortunately, makes for disappointing public policy. The new pay czar pay ruling does precious little to throttle the cascade of dollars pouring into America’s executive suites.

One reason: The pay czar has jurisdiction over executive pay at just seven firms — Citigroup, Bank of America, AIG, General Motors, Chrysler, and automaker financing arms GMAC and Chrysler Financial.

Wall Street’s most profitable players — Goldman Sachs and JPMorgan Chase — don’t fall under the pay czar’s purview. Neither do any of the rest of the companies, outside the pay czar’s less-than-magnificent seven, that make up the Fortune 500.

But the problem with the new pay czar ruling goes well beyond its limited scope. The numbers that kept turning up last week in articles about the ruling — an average 90 percent reduction in cash compensation, an average 50 percent drop in total pay — turn out to conceal more than they reveal.

Typical executives at the seven bailed-out firms under the pay czar’s thumb will see cutbacks nowhere near that severe, mainly because special cases have “skewed [4]” the pay cut averages.

The most glaring of these special cases: Citigroup last year awarded trader Andrew Hall $98 million in bonus. He was due to receive this year another $100 million. But Citi has sold the subsidiary where Hall does his wheeling and dealing. He’ll still get his $100 million, but Citi’s pay outlays for 2009 now show up as $98 million less than last year.

For most top execs, pay czar Feinberg’s plan will shift pay more than cut it. Executives at the seven firms will have to take less pay in cash and more in stock.

At Citigroup last week, top officials assured [5] worried execs and traders that “the net impact of Mr. Feinberg's rulings will be minimal because the cut salary will be shifted from cash to longer-term stock grants.”

One Citi executive, in comments to the Wall Street Journal, would be more blunt. He called [5] claims about a 50 percent cut in total executive pay “a bit of a hoax.”

The fine print in the pay czar’s new plan helps explain the absence of pay panic at Citi. The bank’s three top earners, under Feinberg’s ruling, will this year each collect $475,000 in salary, at least $5.6 million in company stock that they can start cashing out the year after next, and another $3 million in “long-term restricted stock” — a $9 million [6] total for each of the three.

The bottom line: Despite the pay czar's ruling, big-time executives and bankers in the United States will still have ample incentive to pump up their enterprise earnings by any means necessary. They’ll continue to “perform” by squeezing consumers and plotting merger deals that trigger super paydays for executives and pink slips for workers.

Indeed, last week’s media scrum around pay czar Feinberg totally ignored the latest of these pink-slip merger blitzes: Sun Microsystems will shortly be laying off [7] 3,000 employees, 10 percent of its workforce, to get set for its impending takeover by business software giant Oracle.

Oracle's top “performer,” CEO Larry Ellison, just happens to currently rank third [8] on the Forbes list of America’s 400 richest, with a fortune estimated at $27 billion.

The pay czar’s new pay plan does, to be sure, sport some welcome provisions. Executives, for instance, will have to gain pay czar approval before they can get over $25,000 in perks like country club memberships and free personal rides on corporate jets.

But the pay czar’s overall plan, as New York Times analyst Louise Strong notes [9], “will not bring an end to big paydays.”

[10]Nor will the pay guidelines that emerged last week from the Federal Reserve, to cover senior executives, traders, and loan officers at the nation’s top financial institutions. These new Fed principles aim to discourage risky behavior. But they “do not,” as one analyst relates [11], “impose caps on pay or prohibit multimillion dollar pay packages.”

The movers and shakers of the U.S. economy, in short, will still be seeing lavish rewards waving before their faces. Beware the consequences.

“Unless we change the incentives that drive Wall Street to take huge risks,” as venture capitalist and management consultant Peter Cohan put it [12] last week, “we'll be back to those days in the blink of an eye.”

Sam Pizzigati edits Too Much [13], the online weekly on excess and inequality.