Bank of America Corp. chief executive Ken Lewis has decried the big paychecks of financial services executives, but he isn't asking for a pay cut.
In a “60 Minutes” interview broadcast Sunday on CBS, Lewis said Wall Street executives were overpaid. “It's more egregious in financial services than any other industry that I know of,” said Lewis, who made $17 million last year. “We need to cut back compensation in this industry.”
But bank spokesman Bob Stickler, asked this week if Lewis would request lower pay, said: “It would be presumptuous for him to do that.”
Lewis has earned around $213 million since he became CEO in 2001, according to the Observer's calculations, which counts salary, bonus, restricted stock, exercised options and other compensation. His biggest payday came in 2006, when he made $96 million, most of it from exercising stock options he had accumulated over the years.
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Big executive salaries have long been a thorn in the side of shareholder activists and worker advocates. But the issue is gaining more traction as shareholders grow angry watching the value of their holdings plummet. The federal government has added weight to the topic by including executive-pay restrictions in its new bank spending programs.
For example, the government's program for purchasing preferred shares in banks forbids the banks from giving “golden parachute” payments to departing senior officers. It also introduces the idea of “clawbacks,” which allow a company to rescind an executive's bonus if it was awarded “based on materially inaccurate financial statements and any other materially inaccurate performance metric criteria.”
Bank of America is participating in that program, though it doesn't appear that any of its compensation rules would affect Lewis' pay. Bank of America also has said it didn't need the government's money, but was complying with orders from Treasury Secretary Henry Paulson in taking it.
Stickler noted that Lewis' compensation is decided by the board. The head of the board's compensation committee, Temple Sloan, wasn't available for comment on Tuesday.
The bank's shareholder proxy, released in March, says executive compensation is tied significantly to stock awards, so that “our executive officers shared with our stockholders the disappointing performance of our stock price during 2007.”
To determine Lewis' salary, the board's compensation committee considers the pay of executives at peer companies, including Wells Fargo & Co. and Wachovia Corp., and metrics such as revenue and per-share operating earnings. It does not rely on “any formulas or pre-established weightings,” saying those measures “could lead to a false sense of precision” that would ultimately hurt shareholders.
In 2003, Lewis took the unusual step of asking the board to scrap his employment agreement, which would have granted him severance if he were fired. Lewis said then that he should not be afforded protection that other employees don't have. Lewis' direct reports also operate without employment agreements, Stickler said.
Bank of America will soon have a payday headache on another front as it acquires Merrill Lynch. The New York investment firm has clamped down on severance payouts, virtually eliminating them for most of its top officers in February. A Merrill spokesman declined to comment on the reasons behind that move, but Merrill has been heavily criticized over the payout of former CEO Stan O'Neal, who was ousted last October and walked away with an exit package worth more than $160 million. Merrill says O'Neal's payout was based on previously earned compensation, not severance agreements.
Even without severance agreements, Merrill's top officers still will be entitled to millions in previously awarded stock options if they leave the combined company. Merrill's current CEO, John Thain, and chief financial officer Nelson Chai, both on the job for less than a year, will have a significant portion of the stock awards they received as sign-on bonuses vest after the Bank of America deal closes, regardless of whether they stay with the company. Thain's portion would be worth about $17 million based on Tuesday's closing price – a significant drop from the end of last year. Bank of America already has said that Thain will stay with the combined company.
The Wall Street Journal reported Tuesday that Merrill's head of strategy, Peter Kraus, could leave the combined company with as much as $25 million after just a few months on the job. Kraus joined Merrill early last month but will not stay on with the combined bank, the story said, citing people familiar with the matter. One source said Kraus' exit payment is money he would have collected eventually if he stayed on, though that's unlikely to quell shareholders' ire. Merrill spokeswoman Jessica Oppenheim declined to comment on the story, since Kraus' pay is not public.
Three top executives at Charlotte's Wachovia could be due for payouts of up to $20 million each if they leave the Charlotte bank after it is bought by Wells Fargo. But Wachovia chief executive Bob Steel could actually lose money on his short stint there. Steel asked that his employment agreement include no severance pay when he became CEO in July. And two weeks after he was named to the position, Steel bought 1 million company shares at about $16 each – an investment that has lost more than 60 percent of its value.
Steel could still receive up to almost 2 million shares of restricted stock, but only if the stock price meets certain targets of $20 to $35 over the next six years. His 1.5 million options to buy company stock are currently worthless.
Wells Fargo CEO John Stumpf earned $12.5 million in 2007, the year he became chief executive, including about $7 million in options exercised. At a news conference in Charlotte last week, Steel and Stumpf were asked about the resentment swirling around executive compensation. Steel answered for both of them, saying that he and Stumpf were “doing our best to be leaders of our organization.
“And to the extent that people have suggestions on how we can do a better job, or (on) responsibility or compensation issues, then I think we're all ears,” he said, “and you should judge us on our behavior.”