Published October 23, 2009

Brutal US pay cuts for bailout fat cats

Perks slashed, cash pay cut by 90% for top execs at firms that were bailed out

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(WASHINGTON) For those seething over fat cats still getting fat cheques, this may be the time to indulge in a little schadenfreude.

Not only will some top executives be forced to take a 90 per cent cash pay cut, they won't be able to take the corporate jet or limo rides whenever they feel like it anymore.

The Obama administration yesterday ordered seven companies that received the most government assistance at the height of the US financial crisis to cut the salaries of their 25 best-paid executives.

The biggest cuts will be to the cash portions of the 175 employees' salaries, which will be slashed by an average of 90 per cent, and will mostly fall below US$500,000, The Wall Street Journal reported.

Some of the lost cash pay would be replaced by grants of stock that the executives would have to hold for a set period before selling, which will amount to an average of a 50 per cent slash in total pay.

Other measures that may be announced include splitting the positions of chairman and chief executive officer, curtailing the use of corporate jets for personal travel, drivers and any individual perks worth more than US$25,000.

The plan, constructed by US President Barack Obama's 'salary czar' Kenneth Weinberg, applies to companies that have been given 'exceptional' assistance under the Treasury's US$700 billion Troubled Asset Relief Program (TARP). They are American International Group, Citigroup, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial. Altogether, they have received US$240 billion.

Although the order was anticipated, many bankers were surprised by the depth of the cuts and were already trying to identify loopholes.

Compensation experts described the cuts as unprecedented.

'These numbers are brutal,' said Jim Reda, founder of James F Reda & Associates, that advises companies on executive pay. 'Reductions such as these haven't been seen even in companies that are bankrupt.'

Critics said that the action could hurt the affected firms because executives would have more incentive to leave in favour of employers without pay caps.

'It looks like meatball surgery with a sledgehammer,' said Brian Foley, an independent compensation expert in White Plains.

But long-time opponents of giant executive salaries applauded the administration's plan, saying that it had a tremendous symbolic effect.

Treasury Secretary Timothy Geithner this week said that it was 'deeply offensive' that financial firms that risked failure were again planning to pay massive bonuses to their employees. He made his comments after Goldman Sachs Group Inc reported that it was on track to hand out more than US$20 billion in bonuses this year.

Goldman, which has repaid the US$10 billion in TARP funds that it received, disclosed in April that its chief executive, Lloyd Blankfein, received US$43 million in total compensation last year.

But the new measure may have more bark than bite, especially if the rules call for the executives' total compensation to fall by an average of 50 per cent: the actual pay cuts for the top 25 earners at Citigroup and Bank of America could be skewed because their chief executives have already agreed to enormous reductions in salary.

Vikram Pandit, Citigroup's chief executive, announced earlier this year that he planned to work for US$1 a year until the bank posted several consecutive quarters of profits. Kenneth Lewis, Bank of America's chief executive, agreed last week to give up his salary and bonus for all of 2009.

If their pay cuts are factored into the equation, that might give the affected companies more leeway to pay multimillion-dollar bonuses to the other 24 executives included.

Still, whether they manage to circumvent the measures or not, none of the affected executives are destined for the poorhouse.

'I don't think there will be any charity cases on Wall Street,' said House of Representative Democrat Barney Frank. 'This is a very good thing.' - Wire services