Inflated Pay? Executive Performance Goes Under The Microscope

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This story appears in the June/July 2009 issue of Cards&Payments.

Certain payments-industry executives earned more overall last year than in 2007. But bonuses shriveled as the economy weakened and new government rules began to push a fresh focus on executive compensation, Cards&Payments' annual review of various companies' executive-compensation plans has found.

The economic downturn that began last year slowed many companies' growth rates and dampened profits, sharply reducing performance-based incentives and bonuses for many top executives. And the government's introduction of the Troubled Asset Relief Program in October and related legislation thrust financial institutions' executive-compensation policies into the spotlight.

"Most banks and card issuers are rethinking their executive-compensation programs because, for a variety of reasons, what worked in the past likely won't work in the future," says Don Nemerov, an executive director with compensation-benefits consultancy Grant Thornton LLP.

Because of government intervention into capital markets, institutions that received bailout funds are subject to new rules and limitations affecting executive pay, bonuses and severance. "There will also be requirements for a lot more transparency and scrutiny in how execs are rewarded," Nemerov says.

For the payments executives C&P reviewed, average total compensation last year fell 8%, to $6.86 million from $7.46 million in 2007, according to data compiled by PaymentsSource.com, SourceMedia's information and data service for the payments industry (SourceMedia publishes Cards&Payments). Average salaries for top executives increased 9.4%, to $642,240 from $587,109, while average bonuses plunged 53.8%, to $878,143 from $1.9 million (see chart).

PaymentsSource.com compiled the data from the annual proxy statements 12 public, U.S.-based payments companies filed with the U.S. Securities and Exchange Commission (see chart).

Analysts say the economic slump, which minimized top executives' performance-based incentives and bonuses, largely caused the decline in overall compensation.

"For card issuers in particular, the industry is healthiest when loan-loss rates are below 4%. But as last year's average card charge-off rate started to push 7%, it took a bite out of issuers' profits, and that affects overall compensation," says Brian Riley, a research director at TowerGroup, an independent research firm owned by MasterCard Advisors. "The trend in falling pay and bonuses is likely to continue for a while until the economy recovers."

More Changes Coming?
The SEC adopted new executive-compensation disclosure requirements in 2006, but shareholder activists continue to complain that the policies are murky and lack accountability, as executives often walk away with jaw-dropping economic rewards from underperforming companies. But last year's combination of economic and political events likely will force some changes in how companies measure and reward executives' performance.

Through TARP, the U.S. Department of the Treasury last year began purchasing equity of financial institutions to stimulate lending by injecting capital into the financial system. In February this year, amidst public pressure to rein in the pay for top executives at companies receiving taxpayer-generated funds, Congress passed the American Recovery and Reinvestment Act of 2009, applying new executive-compensation rules for TARP recipients.

In general, the law says senior executives at institutions operating with TARP funds may receive only restricted stock, not cash, as bonuses, Nemerov says. Employers also are limited in how much of a top executive's pay they can deduct and how much severance departing executives may receive. TARP recipients will also be required to establish independent committees to oversee executive-compensation packages.

Card issuers that received TARP funds include Bank of America Corp., JPMorgan Chase & Co., Citigroup, Capital One Financial Corp., American Express Co., Discover Financial Services, Wells, Fargo & Co. and U.S. Bancorp. Some are seeking regulator approval to return the funds, and at deadline it was unclear when or whether they would be allowed to do so. Also, the U.S. Treasury had not yet finalized the specific executive-compensation guidelines, which vary based on the amount of TARP funds institutions accept.

"While they are waiting for the Treasury Department to issue final standards, financial institutions may have to rethink their compensation programs accordingly, including reconsidering whether they want to take the proffered government funds," says Sheryl Vander Baan, a partner with the U.S.-based accounting and consulting firm Crowe Horwath LLP.

The prospect of placing limits on executive pay will create further challenges for card issuers struggling to retain top talent as their profits decline, some observers say.

"There is little doubt in most of our minds that there has been some excess in compensation, where the shareholders didn't fare well but CEOs did, or where prospects for business weakened while top executives continued to rake in money," says Robert K. Hammer, chairman and CEO of U.S.-based R.K. Hammer Investment Bankers.

But Hammer warns that government intervention in executive-compensation plans ultimately could dampen industry competition and performance. "The government should not be involved in dictating executive compensation," he says. "What executives are paid should be determined solely by the board and the shareholders."

Recruitment Effects
Regardless of how TARP affects individual institutions, the tough economy means card issuers will have to work harder to recruit and keep talented executives, Nemerov suggests. "It will be harder for banks to provide career paths for their top execs through these tough times, but the basics will still apply," he says. "Execs like to have responsibility and leadership, and for those willing to embrace these challenges, there will be opportunities."

Certain executives at top card-issuing companies saw their pay fall sharply last year. Among them were Kenneth D. Lewis, president and CEO of Bank of America, the nation's No. 1 bankcard issuer. Lewis's total compensation fell 60%, to $9.96 million from $24.8 million in 2007 as the company missed its performance targets. Lewis received the same salary last year as he did in 2007, but his compensation from stock awards fell 61.3%, to $4.3 million from $11.1 million. BofA's shareholders in April stripped Lewis of his additional role as company board chairman.

Richard Fairbank, chairman, president and CEO of Capital One Financial Corp., saw his total compensation fall 52%, to $9.8 million from $20.4 million in 2007. Fairbank received no salary or bonus in either year, and his income typically comes primarily from option awards. (An adjustment in the value of previously vested stock also resulted in a decline in value of Fairbank's 2007 stock awards.)

Total compensation for Visa Chairman and CEO Joseph L. Saunders last year fell to $10.1 million from $11.1 million in 2007, while the components of his pay shifted dramatically. Saunders received a bonus of only $1.9 million compared with $10.2 million in 2007. But his total compensation declined only 9% because last year he earned more from other types of compensation, including $3.3 million in option awards and $2.8 million in nonequity incentive-plan compensation, while his salary increased 18%, to $950,009 from $804,519.

Some Earned More
Some other executives' total compensation experienced healthy growth last year. Alliance Data Systems Corp. Chairman J. Michael Parks' total compensation rose 8%, to $6.7 million from $6.2 million. Ivan M. Szeftel, Alliance executive vice president and retail credit president, pocketed more than 30% more in total compensation last year, receiving $4.7 million compared with $3.6 million a year earlier.

Top executives at Discover Financial Services also earned more than they did a year earlier. Chairman and CEO David W. Nelms' overall compensation rose nearly 4%, to $8.3 million from $8 million, while Roger C. Hochschild, president and chief operating officer, earned $6.9 million in total compensation, up more than 16% from $5.9 million a year earlier.

Despite gains at some companies, the general trend is toward declining compensation for top executives at card issuers, primarily because of the economy, says Srini Venkateswaran, a former Citibank credit exec who is now a partner in the Financial Industry Group at A.T. Kearney. Though there is more public scrutiny than ever on bankers' and card executives' salaries, "it's a bit misleading because in consumer finance, most employees do not make a tremendous amount of money," he says. "Those at the top are paid more and proportionately to their experience and skills."

Consolidation among top issuers also is putting pressure on top execs at card-issuing companies, Venkateswaran says.

"There is anecdotal evidence that certain top execs are worried about their careers" because there are fewer job openings in the executive suites at the highest levels of the card-issuing industry, he says. "An investment banker can leave a big bank and go to a boutique firm and possibly make even more money, but there are no boutique card issuers that pay the high salaries these top card execs receive."

But card execs hoping for fatter paychecks might have to wait awhile, Riley says. Even without the new executive-compensation rules for companies receiving TARP funds, card execs' bonuses are tied to growth in consumer card-spending volumes and higher revenues, and both are decelerating.

"It's pretty ugly right now for card executives hoping for a big raise," Riley says.

Executives in card issuers' debit card and prepaid card divisions may have the brightest outlook for earning more money than credit card execs in the foreseeable future "because those are two areas where more immediate growth is likely," he says.

Riley also predicts that many financial institutions will try to return any TARP funds to the government as soon as possible because they are uncomfortable with the accompanying compensation restrictions. "Issuers want to regain leverage over how they run their companies and reward their employees because it's one of the key ways for them to remain competitive," he says.

Executive compensation fell last year, and it may tumble further because of continued economic woes. And it is a safe bet there will be more scrutiny of what top executives are paid and what they did to deserve their earnings.  CP