Ethics Matters: Corporations to blame for fed restrictions on executive pay

The United States is in a financial crisis unprecedented since the Great Depression.

The Dow Jones Industrial Average is down over 40 percent in value since 2007. Unemployment is at a 42-year high. Congress is hanging our troubled economy on a nearly $800 billion stimulus bill. Shaky financial institutions are receiving billions in federal bailout money from the U.S. Treasury's Troubled Asset Relief Program.

Given the current financial crisis, you would expect directors of corporations in financial trouble to avoid paying executives excessive annual salaries and huge bonuses. To do so would be ethical and good public relations.

Unbelievably, the directors of many financially troubled corporations continue to award nonperforming executives millions in annual pay and bonuses.

Merrill Lynch lost $35.8 billion in 2007 and 2008 and Bank of America bought the company. Before the sale, Merrill Lynch's board of directors approved a $3.6 billion 2008 bonus pool for 700 employees. In 2008, Merrill Lynch's directors ousted the corporation's CEO, E. Stanley O'Neal. O'Neal, however, received $157.7 million in compensation during his six years as CEO and $161 million when he left the company.

Countrywide Financial lost $3.9 billion in 2007 and 2008. The losses wiped out all of Countrywide's 2006 earnings and much of its 2007 earnings. Countrywide's board of directors, however, paid former CEO Angelo R. Mozilo $82.4 million in performance pay between 2005 and 2008.

Washington Mutual's $8 billion in mortgage-related losses in 2007 and 2008 forced its sale to JP Morgan Chase. Although the corporation failed, its CEO from 2003 to 2008, Kerry K. Killinger, received $38.2 million in pay during the five years.

American International Group, Bear Sterns, Citigroup, Countrywide Financial, Lehman Brothers, Merrill Lynch and Washington Mutual paid executives almost $500 million in performance pay from 2005 through 2008, even as they suffered enormous financial losses.

How do directors and executives justify such outlandish executive pay? One, they argue that extravagant pay encourages and rewards superior performance. Second, they contend the money is necessary to keep talented people. Both arguments fail miserably given the massive financial losses suffered by the corporations. Where is the superior performance when the corporation fails?

Several previous Ethics Matters columns warned about the growing public discontent with excessive executive pay and threats of government interference.

Public outrage often leads to political action. The business failures in the early 2000s and public pressure resulted in Congress passing the Sarbanes-Oxley Act of 2002. Among other things, SOX requires full disclosure of executive pay. Congress believed that full disclosure would keep directors from awarding excessive pay to executives, or at least to nonperforming executives. It obviously did not.

For months, federal officials and congressional leaders threatened federal intervention in executive pay. The threats are now a reality as a result of TARP. TARP funds and the massive stimulus package.

U.S. Sen. Christopher Dodd, D-Conn., got executive pay limits into the stimulus bill. The bill limits an executive's bonus to one-third of the executive's annual salary, and the bonus must be a long-term incentive, such as restricted stock, which cannot be sold until the company repays TARP funds.

Treasury Secretary Timothy F. Geither unsuccessfully tried to limit the annual pay of executives to $500,000 if their banks received TARP funds.

The federal government controlling executive bonuses is a step toward nationalization of corporations. Will the government eventually establish guidelines for all executive pay? What other decisions will government eventually demand to make for corporations? Where does capitalism end and nationalization begin?

Unfortunately, public outrage over executive compensation is so severe that politicians can exploit the executive pay issue. The directors of financially troubled institutions that pay ridiculous amounts of money to nonperforming executives are at fault for the threat of increased government interference in corporate decisions.John D. Copeland, J.D., LL.M., Ed.D., is an executive in residence at The Soderquist Center for Leadership and Ethics and professor of business at John Brown University in Arkansas.