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What Happened? Government Forces Ken Lewis to Work for Free

By Brian | October 17, 2009 | Share on Facebook

Throughout the past year, I’ve written a few posts about various aspects of the financial crisis, but I’ve purposely stayed away from writing specifically about my employer – Bank of America.

I don’t speak for Bank of America. My words on this blog are mine and mine alone. No one at work reads them, approves them or, for all I know, even agrees with them. Still, I’ve made it a self-imposed, personal policy to steer clear of stories that involve the company, just to be safe. This morning, though, when I read about Kenneth Feinberg, the “Special Master for Compensation” (a.k.a., “The Pay Czar”), I felt compelled to speak out.

Just to be clear, though: these are my opinions. They don’t necessarily reflect the views of anyone else on the planet, whether they’re affiliated with Bank of America or not. Are we clear? OK, good.

First, for those who don’t know, here’s what happened (source: Bloomberg.com):

Oct. 16 (Bloomberg) — Bank of America Corp. Chief Executive Officer Kenneth Lewis won’t receive a salary or bonus for 2009, a decision based on advice from U.S. government pay supervisor Kenneth Feinberg.

“Lewis felt that it was not in the best interest of Bank of America to get involved in a dispute with the pay master,” spokesman Robert Stickler said yesterday in an interview. The CEO had a base salary of $1.5 million for the past three years and must return wages already received in 2009, Stickler said.

In the same article, Andrew Williams, a spokesman for the U.S. Department of Treasury, described Mr. Feinberg’s role thusly:

Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk-taking and reward performance for their top executives. We are not going to provide a running commentary on that process, but it’s clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance.

Mr. Williams’ words conveniently serve to highlight the ridiculousness of Mr. Feinberg’s agreement with Mr. Lewis. Essentially, Mr. Feinberg has concluded that in Ken Lewis’ case, the appropriate balance between discouraging risk-taking and rewarding performance is zero dollars. In other words, no balance at all. Mr. Lewis is to be penalized, for the most part retroactively (he has to return the 9.5 months of salary he’s received thus far in 2009), at a rate of 100%. He is to receive absolutely no compensation for any of the work he has done during this calendar year.

That’s not balance. That’s indentured servitude.

Now, before someone jumps down my throat for defending Ken Lewis, let me be clear: Mr. Lewis is under investigation by several state and federal authorities for his actions related to the Bank of America/Merrill Lynch merger of September, 2008, specifically around the December payment of bonuses to Merrill Lynch’s employees just prior to the merger’s close, his negotiations with the federal government just after the close, and the quality and quantity of his communication with the bank’s shareholders during that time. As one of those shareholders, I firmly believe that if Mr. Lewis is found guilty of some crime as a result of these investigations, then he should be punished as per the law, including financial penalties that could total as much as, or even more than, his entire 2009 compensation package.

But those investigations are ongoing. Evidence has not yet been reviewed; conclusions have not yet been reached. Mr. Feinberg, on his own, sole authority, has decided that Mr. Lewis will receive absolutely nothing for all of the hours he’s put in at Bank of America during 2009. A single man, elected by nobody, impeachable by nobody, answering only to the President of the United States himself, has declared Ken Lewis’ contribution at Bank of America to be completely and totally worthless.

Some pre-emptive points to the arguments I can see coming a mile away: it shouldn’t matter at all how much money Ken Lewis has, or whether he needs the money or not. This is not about Mr. Lewis’ financial security. This is about whether an American citizen has the right to be compensated as per his agreement with his employer.

It also shouldn’t matter at all that Mr. Lewis has accumulated some $69 million in retirement benefits during his forty years with the company. The Wall Street Journal reported this morning that Mr. Feinberg made his decision because “he thought the package of retirement benefits and unvested stock Mr. Lewis takes with him when he steps down at year’s end . . . was large enough, and possibly too big.” If Mr. Feinberg is truly out to balance risk-taking with rewarding performance, one would think he’d be thrilled with such a large package. After all, how much more can you incent long-term success as opposed to short-term gain than by deferring $69 million in compensation over a forty-year period? As Bloomberg points out, the rewards he received over those forty years were originally worth $125 million, so the deferral has already cost Mr. Lewis some $56 million, reflecting the recent turmoil in the financial markets. If Mr. Lewis were not retiring this year, would Mr. Feinberg allow him a few bucks for his time in 2009? Perhaps the absence of a balloon payment at the end of forty years of service to a company would be enough to allow Mr. Lewis’ employer to honor its compensation agreements in that last year?

What comes next? Can the government simply take away 100% of the salary of anyone it doesn’t like, forcing them to work for free? Can we mandate that people who earn a large windfall in a particular year shouldn’t receive a salary on top of it? Perhaps lottery winners should be forced to give their earnings back to their employers, since their lottery winnings are likely “large enough, and possibly too big?”

Ken Lewis has had, arguably, the most difficult job in America for the last eighteen months. He has been put upon by two administrations to rescue the nation’s largest subprime mortgage lender, to accept TARP funds as a sign of good faith in the American financial markets, to acquire a failing brokerage with less than 48 hours notice, and to close that deal with still more TARP funds, despite his concerns that it could jeopardize his firm. On top of that, he’s been called before Congress on several occasions, vilified by the press, pressured into waiving his company’s attorney/client privilege, publicly criticized by seemingly every politician and pundit in America, and most recently – sued personally by the SEC for his actions during those tumultuous times.

If Mr. Feinberg’s argument is that Mr. Lewis’ 2009 compensation package was excessive, than he should provide a reasonable model for a package that he’d consider fair. Metrics tied to long-term performance of the company, perhaps? Deferred payments based on selected financial goals? Maybe even payments adjusted to reflect the relative success of the U.S. economy over the next few years? As it stands, Mr. Feinberg is suggesting that one dollar, payable a hundred years from now, would be too much money for Ken Lewis to earn this year. Allowing him anything – anything at all – would, according to Mr. Feinberg, inappropriately encourage risk-taking at the expense of rewarding performance.

Mr. Feinberg’s failure to identify a package that would strike an appropriate balance in this case reveals his decision to be both punitive and lazy, which is in direct conflict with his job description and the expectations of the people he serves. At the end of this month, Mr. Feinberg will release the rest of his recommendations on compensation packages for top earners at several other banks. Given the absence of any reasoned analysis displayed here, how are we to believe that his forthcoming recommendations are fair? Thoughtfully considered? Well researched?

How, in short, could he possibly have any credibility left at all?

Topics: Money Talk, Political Rantings | 9 Comments »

9 Responses to “What Happened? Government Forces Ken Lewis to Work for Free”

  1. Lisa Rafal says at October 17th, 2009 at 8:37 am :
    Is it okay to ask if any of this sounds socialist to anyone else? Good grief…a Pay Czar? How many more people will this administration appoint without congressional oversight (as if it would matter if Congress DID have to approve them) to interfere with every possible mechanism in this country? It’s insane.
    Interesting, that in the name of…wait, was is it in the name of? Well, anyway, with some supposedly good intention that we are trashing the constitution and justice system in this country.
    Who in heaven’s name decided that Mr. Feinberg is to have the privelege of deciding how much money anyone should make or receive in retirement?
    Hey Brian, NOW what do you think about the Obama admnistration??

  2. Joe Woods says at October 17th, 2009 at 10:34 am :
    … and everyone not watching Fox News is lapping it up and loving it. I don’t know what upsets me more; the leaders or the followers.

    It could be worse, Brian. While all this is happening, one of us could be worried sick because we have a daughter or son in Afghanistan waiting for the White House to figure out how to process the general’s urgent request for immediate help.

  3. Brian says at October 17th, 2009 at 11:41 am :
    @Lisa – I’m sure this isn’t the answer you want to hear, but I have the same reaction to those who trash the entire Obama administration as I did to those who trash the whole Bush administration.

    No one’s trashing the constitution or the justice system here. President Obama has appointed someone to review and approve executive pay in banks that took TARP money. I disagree with that decision. The person he appointed, in my opinion, misused his authority to impose a personal, ad-hoc penalty on a hard-working and (as of now) innocent man. I disagree with that decision as well.

    “Socialist” is, as we learned earlier on this blog, a loaded term. We are still a representative republic, and as far as I can tell, President Obama and Kenneth Feinberg haven’t run afoul of the law. They are, however, exerting more control over the private sector than any administration in my memory – possibly in our nation’s history. They will answer to that in the voting booth in 2010 and 2012.

    In the meantime, I’ll continue to judge each & every action that President Obama, Ken Feinberg, and others make as they come. Expanding my complaint about this to a general condemnation of the entire administration weakens my argument. I’m ticked off about this, so this is what I’m talking about.

    @Joe – schadenfreude aside, plenty of people are upset about this. Check out the quotes in the Bloomberg and Wall Street Journal articles. Other than one union group speaking in general terms about “bankers gone bad,” everyone else is using words like “punitive,” “over-reaching” and “bad precedent.” I think there will be political fallout over this, as well there should be.

    As to Afgahnistan – yes, that would be far worse. This is, after all, only money we’re talking about. But to my point above, my feelings on Obama’s foreign policy are not what is coloring my opinion on Ken Feinberg’s deal with Ken Lewis. That’s a whole other blog post…

  4. Lisa Rafal says at October 17th, 2009 at 1:10 pm :
    In my opinion, what they are doing is creating an environment in which innovation will perish for lack of motivation. Yes, the banks got TARP funds, and yes, they need to be accountable for how they are spending the money, and yes, they had no choice but to take the money, and yes, i think that after causing the economy to collapse, it seems ridiculous to give incentive bonuses for productivity. And I don’t necessarily think that ANYONE in ANY bank deserves a bonus, because at this point I am the one paying it to them, BUT…you can’t have the government deciding private sector pay scales. HOWEVER, since the government effectively has taken over the banking system, I guess you’re a government employee.
    It is not an ideal of capitalism to limit compensation. So, if you don’t want to call it socialism, what do you want to call it? And next will be GM…their executives will have to have their pay packages okayed by the government. And soon, your doctors will be government employees too. FDR could have learned a thing or two about government interference from Obama…too bad they never had a chance to meet.

  5. Brian says at October 17th, 2009 at 4:50 pm :
    OK, Lisa – now you’re talkin’ crazy talk.

    Wall Street bonuses aren’t cash prizes for specific achievements; they’re the portion of one’s salary that is subject to adjustment based on the performance of the indivdiual, the bank as a whole, and even the economy itself. Remember that Wall Street lowered bonuses by 40% without any government mandate at all in 2008 – they don’t pay any more than they have to to retain their people (just like any other company). Suggesting that NO ONE deserves a bonus is akin to suggesting that no one deserves 50% (or more) of their salary, which is almost as crazy as what Ken Feinberg did. Bonuses, like any other compensation, should be determined on a case-by-case basis, using a repeatable, defendable model that is based on definable metrics. Then, if we want to argue about the model, fine. Broad statements like yours and Mr. Feinberg’s are just shoot-from-the-hip solutions to a complex issue. Of course, you’re just posting on my blog. Mr. Feinberg’s ideas are binding…

    And no, the government has not taken over the banking system. Their investment in BofA comes to less than 2% of the firm, and levels are similar in other banks as well. The only exceptions are AIG and Citigroup. AIG, at roughly $120B in aid, has received far more than any bank, and Citigroup agreed earlier this year to turn their TARP preferred shares into common equity, giving the government a much bigger (voting) share.

    If we were a socialist state, the government would exert control over the companies without making an investment. As it stands, the government is acting like socialists in a capitalist framework – intervening in the day-to-day operations of private companies in unprecedented ways.

    If you’re looking for the stifling of innovation, keep an eye on the auto and health care industries – time will tell if the government has the stomach for long-term investment in new technology, or if various Senators and/or Congressmen will shout down such programs as “pork barrel spending,” especially during bad economic times, or when the investment comes in someone else’s state or district.

    In the finanical services industry, the effect of TARP so far has been an exodus of key executive talent to non-US banks and smaller, less regulated hedge funds. My fear there isn’t lack of innovation – it’s innovation (and investment) by others who are not under such resrictions. If you think you’re hearing a lot about how much of our debt China owns right now, wait until they have major equity stakes in our highest growth companies.

    FDR likely could never have imagined such a world…

  6. Lisa Rafal says at October 20th, 2009 at 7:57 am :
    One point I’ll whittle down a little finer is the bonus issue. A bonus is a reward, it is not salary, otherwise it would come in a regular paycheck. Bonuses, generally, are tied to productivity and accomplishment as well as company performance. In a year when the government had to intervene to keep banks from closing, I find it hard to understand how company performance dictates that bonuses are merited, and even if you can argue that they are merited, how do you argue that they should be anywhere near the levels they were at previously? I don’t expect you to say that YOU didn’t deserve a bonus, obviously, but being objective, you can certainly see how it rubs the American public raw. AND, when one accepts a job that is based on either commission or bonuses, one must realize that a lot of times, the economy drives those compensation agreements and that lean times are lean times.
    I think where we may be starting to see eye to eye is in the fact that this administration (and yes, I’m painting with that BROAD brush again) is going to ultimately be responsible for squelching whatever possibility we had of returning to a healthy free-market economy. As a very good liberal friend of mine said to me a short time ago, it is puzzling that someone who could be an inspirational leader seems bent on leading by dictate rather than by inspiring. In creating so many of these “czars” it seems that our president himself has created the appearance of a monarchy here in the great United States. One of the principles of our founding fathers was the system of checks and balances which Obama neatly circumevents by creating these czars who do not answer to anyone but him. We’re in a whole heap of trouble and it still seems like no one really “gets” it.

  7. Brian says at October 20th, 2009 at 3:42 pm :
    A bonus is a reward, it is not salary, otherwise it would come in a regular paycheck. Bonuses, generally, are tied to productivity and accomplishment as well as company performance.

    But salary can’t be tied to productivity and accomplishment? Are tips part of the salary for restaurant servers who otherwise make less than minimum wage? If not, we’ve got to arrest a whole bunch of restauranteurs. How about salespeople who earn commissions? For some of them, commission is 100% of their pay. Does that mean they have no salary?

    I realize the scale isn’t the same here. The average Wall Street employee makes way above the average American worker. Then again, they have way above the average education and skill set. And their base salary (the amount they make in their regular paycheck) is way below what they could earn just about anywhere else.

    The performance of a Wall Street firm is measured every quarter, which is why bonuses are accrued every quarter. They’re paid out annually (as opposed to in a regular paycheck) so that the company can adjust for short-term gains or losses during the year. This is why you’ve been reading about Wall Street bonuses every quarter of 2009, even though not a single dime of them have been paid yet.

    In a year when the government had to intervene to keep banks from closing, I find it hard to understand how company performance dictates that bonuses are merited, and even if you can argue that they are merited, how do you argue that they should be anywhere near the levels they were at previously?

    Bonuses are merited because if you don’t pay your employees, they’ll go work somewhere else. The American firms are already seeing a mass exodus to the likes of Barclays, Credit Suisse and DeutscheBank. With that talent goes the clients and the big deals. Don’t like the percentage of U.S. public debt that China currently holds? Don’t like the percentage of equity the U.S. government owns in the private sector? Wait until those big equity investments are held by offshore investment banks. Not only will our job market take a hit, but our regulatory control will diminish as will our ability to control corporate behavior through tax policy.

    I don’t expect you to say that YOU didn’t deserve a bonus, obviously, but being objective, you can certainly see how it rubs the American public raw. AND, when one accepts a job that is based on either commission or bonuses, one must realize that a lot of times, the economy drives those compensation agreements and that lean times are lean times.

    First of all, yes – I can absolutely see how this rubs the American public raw (some metaphors are just a little too colorful, btw). Wall Street has been vilified beyond all rational discussion, to the point of people demanding their hard-earned tax dollars back from the banks, but balking at the idea of the banks turning a profit.

    As for my own bonus and my willingness to accept the risk/reward paradigm, you’ll find no argument from me. My 2008 bonus was 50% of my 2007 bonus, despite a positive review of my personal performance. I’m happy to “take one for the team” during the lean times, provided I’m allowed to share in the rewards during the good times.

    I realize that actual data only serves to stand in the way of righteous outrage, but here is a table showing Wall Street bonuses each year for the past 20+ years, and here is a table showing Wall Street’s net income going back to 2001. The data compares as follows:

    • In 2002, Net Income was down 33.5%, and bonuses were down 25.0%
    • In 2003, Net Income was up 120.1%, and bonuses were up 61.3%
    • In 2004, Net Income was down 35.0%, and bonuses were up 17.7%
    • In 2005, Net Income was up 19.8%, and bonuses were up 38.2%
    • In 2006, Net Income was up 81.6%, and bonuses were up 33.0%
    • In 2007, Net Income was down 78.1%, and bonuses were down 3.6%
    • In 2008, Net Income was down 515.3%, and bonuses were down 44.0%

    What you see, generally, is that in good times, bonuses go up slower than profits, and in bad times, they go down slower than profits (the exception being 2004-2005, when profits “bounced” and bonuses kept increasing).

    Given how horrible 2008 was, I’d expect we’ll see Net Income increase in the 100% to 150% range (back to 2007 levels) and the bonuses increase 50% to 100% range (likely just below 2007 levels, if only for public relations reasons).

    As a very good liberal friend of mine said to me a short time ago, it is puzzling that someone who could be an inspirational leader seems bent on leading by dictate rather than by inspiring.

    Heh…I hope Jeff Porten is reading this, because your “very good liberal friend” is me. You’re quoting me from here:

    This is the second time, to my knowledge, that Obama has approached a desired goal with the stick and not the carrot (the first being his community service program, wherein schools would lose federal funding if a certain percentage of its students didn’t do community service). I find it ironic that someone who is so good at inspiring others seems bent on mandating change from people, rather than inspiring it.

    First time I’ve been accused of being liberal…

    As for the rest – “squelching whatever possibility we had of returning to a health economy,” “creat[ing] the appearance of a monarchy,” “circumventing checks and balances” and such – I’ll just add this: I think Mr. Feinberg’s performance in this specific instance stinks on many levels. There are some aspects of this behavior that appears to be a pattern with the Obama administration, which is also troubling. Then again, there are signs that maybe the administration may be learning from their mistakes.

    All in all, despite my displeasure with this case, I’m not worried about the state of the republic.

  8. Lisa Rafal says at October 20th, 2009 at 10:27 pm :
    Actually, Brian, it wasn’t you I was quoting…it was someone else.

  9. Brian says at October 20th, 2009 at 11:32 pm :
    Interesting. Could the person you were quoting have been quoting me? If not, that’s a pretty cool coincidence…

    Liberal and Conservative minds thinking alike! Cats & Dogs living together! Pigs flying! (or at least, Swine Flew! – HA!) It’s Armageddon, I tell ya…!

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