The scrutiny of executive pay in Washington isn't knocking down the compensation of banks' head honchos. It's just changing what form the money comes in.
Just look at Wells Fargo & Co.'s recently altered pay plan. Earlier this month, the San Francisco bank raised CEO John Stumpf's salary to $5.6 million, through a mix of cash and stock. That's more than six times his salary last year.
The generous bump doesn't violate any rules Wells Fargo is bound by under the Treasury Department's Troubled Asset Relief Program, which doled out $25 billion to the bank last fall to shore up its capital base. That's because the new pay scheme doesn't include a bonus, just a guaranteed higher salary.
But the move stretches what's allowed to its limits. It's that tactic the Obama administration's new pay czar Kenneth Feinberg has to be on the lookout for in the coming months as he reviews the compensation plans of seven companies that have received "exceptional assistance" from the government. Feinberg received the pay information over the last week, and his findings due in October are expected to be a blueprint for pay programs throughout the financial industry.
Wells Fargo isn't one of the companies on Feinberg's to-do list, but it well illustrates the struggle to determine what is "fair" pay in today's corporate world.
"There is no denying that some of these executives have really hard jobs," said J. Robert Brown, a professor of business law and corporate governance at the University of Denver. "But there is another element to all this over what is politically acceptable."
Soaring bonus payouts to financial service company executives tied to short-term results clearly played a role in the financial crisis. In recent years, 80 percent to 90 percent of executive compensation was driven solely by annual performance, according to compensation consultant David Wise of the Hay Group.
That led to excessive risk-taking, which ultimately backfired and resulted in losses so large that the government had to step in with multiple rescue plans.
Congress and the White House have been wrangling over how to shift the compensation paradigm. The House on July 31 voted to prohibit pay and bonus packages that encourage bankers and traders to take risks so big they could bring down the entire economy.
The Obama administration has proposed giving shareholders at all public companies a nonbinding vote on compensation packages. In addition, it wants to diminish management's influence on pay decisions by banning members of board compensation committees from having financial relationships with the company and its executives.
Feinberg is the first federal official to have veto power over the how much private-sector executives are to be compensated. Included in his review are pay plans submitted by American International Group, Citigroup, Bank of America, General Motors, Chrysler and the financing arms of the two automakers.
All this political intervention isn't intended to drag down executive pay to nothing. In fact, financial companies will continue to pay sums to executives that will likely astonish average workers.
The goal is to force companies to come up with compensation programs that better align shareholders' and executives' interests. Getting there won't be easy because there isn't a magic metric for fair pay.
The compensation changes at Wells Fargo shows how deciding what's appropriate can get murky.
Its CEO Stumpf will get $900,000 in cash as part of his 2009 salary, the same as last year. But he will also get another $4.7 million in stock that has been labeled as being part of his salary. Stumpf and three other executives who also got large salary increases can't sell these new shares until the company repays the government's bailout money.
Stumpf will also receive 108,528 in restricted share rights this year, valued at $2.8 million when they were granted earlier this month. Those shares will begin to vest in 2011.
That brings his total compensation in stock and cash at the time it was granted to $8.4 million for 2009. Last year, his total compensation in cash and stock options was valued at about $8.8 million when it was granted.
"We are using stock to increase their salaries to keep the pay of these leaders closely tied to the success of the shareholder," said Wells Fargo spokeswoman Melissa Murray. "We must pay our senior leaders competitively for the long-term success of our company."
But another way of looking at this is that Wells Fargo's top brass are getting guaranteed pay not necessarily tied to financial results. At the end of every two-week payroll period, Stumpf will get a portion of that $4.7 million in stock, with the amount of shares determined by where the stock is trading then. If the stock goes down, he gets more shares; if it goes up, he gets fewer.
That means a short-term drop in Wells Fargo stock could actually benefit the bank's executives. They also benefit from the fact that the stock now trades around $28 each, about a third less than what it was last fall.
"How can this be called a well designed plan because all the executives have to do is sit around in order to get paid?" said Paul Hodgson, a senior research associate at The Corporate Library, an independent corporate governance research firm.
Hay Group's Wise said financial companies that took government money don't have many options in how they can structure their pay programs at a time when there is talk of a potential brain drain of top talent. He believes the amount of compensation won't change much, just the makeup — most likely meaning salaries will grow while bonuses could shrink.
"Wells Fargo is doing exactly what the taxpayers were afraid banks would do, and the Treasury led them there," Wise said.
The coming months will be very telling for the future of executive pay, especially for financial firms. Feinberg's recommendations for the seven firms he reviews will be closely watched, and likely mimicked.
What's becoming ever more apparent is the fine line between allowing for competitive compensation and creating imbalanced incentives.