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US: Chiefs’ Pay Under Fire at Capitol

by JENNY ANDERSONThe New York Times
March 8th, 2008

WASHINGTON — In pointed exchanges with Congressional lawmakers Friday, three prominent financial executives defended the multimillion-dollar pay packages they received even as their companies were brought to their knees by the spreading credit crisis.

The executives, Charles O. Prince III, the former chief executive of Citigroup Inc." href="http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html?inline=nyt-org">Citigroup; E. Stanley O’Neal, the former chief executive of Merrill Lynch; and Angelo Mozilo, the founder and chief executive of Countrywide Financial, dismissed suggestions that they had reaped lavish compensation while fostering the spread of risky subprime lending.

The tone was captured in a testy exchange between Elijah E. Cummings, Democrat of Maryland, and Mr. Mozilo.

Mr. Cummings asked why the executive had urged Countrywide to pay taxes on his wife’s travel on the company’s private jet. “I have some constituents who are losing their houses; you are upset about your wife,” Mr. Cummings said.

Mr. Mozilo responded, “It sounds out of whack today because it is out of whack, but in 2006, the company was doing great.” Mr. Mozilo said he would not have made such a request today and apologized for complaining about his compensation in an internal e-mail message. “It was an emotional time,” he said. “I apologize for that memo.”

The questioning mainly fell along party lines, with Republicans apologizing for bringing distinguished corporate officials before the panel, and Democrats questioning everything from the income gap in America to the particular bonuses, stock sales and compensation the executives were awarded.

Mr. O’Neal and Mr. Prince lost their jobs last fall after the collapse of the subprime market but left the companies with sizable pay packages. Mr. Mozilo’s once highflying company is now being acquired by Bank of America Corporation" href="http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html?inline=nyt-org">Bank of America.

Along with the three executives, the chairmen of the compensation committees at all three companies also testified, along with a panel of academics, corporate governance advocates and state and municipal officials.

Many Republicans on the committee fought the very premise of the hearing. “This is a hearing in search of bad guys,” said Darrell E. Issa, Republican of California. “Are there bad guys in front of me? I’m not seeing it.”

Thomas M. Davis III of Virginia, the ranking minority member, said that even if the executives had been paid nothing, there would still be a housing crisis. And Mr. Issa emphasized that all of the executives were primarily rewarded with stock, meaning they have suffered alongside shareholders as the value of financial stocks has plummeted.

But the Democrats homed in on why executives who oversaw such vast losses were so well compensated.

“There seem to be two economic realities operating in our country today,” Representative Henry A. Waxman, Democrat of California, the chairman of the House Committee on Oversight and Investigations, said as the hearing opened. “Most Americans live in a world where economic security is precarious and there are real economic consequences for failure. But our nation’s top executives seem to live by a different set of rules.”

The question before the committee, he said, was this: “When companies fail to perform, should they give millions of dollars to their senior executives?”

John D. Finnegan, chairman of Merrill’s compensation committee, was asked why Mr. O’Neal was permitted to retire rather than being forced out for cause. If Mr. O’Neal had been fired, he would have forfeited the $131 million in stock and options he had earned in prior years.

Mr. Finnegan said cause involved unethical behavior, not bad judgment. Mr. Waxman retorted: “To say you don’t have the tools, it means that even if someone performs badly there are no consequences.”

Executive compensation has emerged as a hot topic in Washington in recent years. Surveys show that Americans, regardless of their income or political leanings, overwhelmingly believe that business leaders are overpaid. The hearing shed some light on how Wall Street’s compensation philosophy may have contributed to the mortgage boom. Corporate boards and compensation committees agreed to lucrative bonus plans that gave executives strong incentives to take big risks.

Mr. Mozilo’s pay drew the most scrutiny from the House committee. He has taken home more than $410 million since becoming chief executive in 1999, including several stock sales made under an automatic plan while the company was buying back shares.

Federal securities regulators have been scrutinizing those trades. And in a report released Thursday, Congressional investigators found that the use of a flawed peer group and easy bonus targets helped inflate his pay. He also was entitled to a $37.5 million severance package, though he forfeited that in January, after Congress requested that he testify.

Mr. O’Neal and Mr. Prince each landed big payouts when they resigned.

Mr. O’Neal retained more than $161 million after he was ousted in October on top of the $70 million he took home during his four-year tenure. The bulk of the exit pay was linked to previously earned benefits and stock since his departure was deemed a retirement; he did not receive any severance pay. Merrill Lynch, meanwhile, has announced write-offs totaling more than $10.3 billion, and its stock price has fallen sharply.

Mr. Prince collected $110 million while presiding over the evaporation of roughly $64 billion in market value. He left Citigroup in November with an exit package worth $68 million, including $29.5 million in accumulated stock, a $1.7 million pension, an office and assistant, and a car and a driver. Citigroup’s board also awarded him a cash bonus for 2007 worth about $10 million, largely based on his performance in 2006 when the bank’s results were better. Citigroup has announced write-offs worth roughly $20 billion and its share has plummeted over 60 percent from last year’s high.

In his prepared testimony, Mr. Prince focused on his humble beginnings, as the first member of his family to go to college, and the plaudits that Citigroup received for improving corporate governance on his watch.

Since his resignation, he said, “some have raised questions about my compensation, and much of the information reported in the media is incomplete or inaccurate.”

Mr. O’Neal, too, said reports about his compensation package were inaccurate. “The reality is that I received no severance package,” he said in prepared testimony.

And Mr. Mozilo, noting that “our stock price appreciated over 23,000 percent” from 1982 to 2007, said he received performance-based bonuses approved by shareholders and exercised options as he prepared for retirement. “In short, as our company did well, I did well,” he said.

Mr. Waxman ended the hearing by complimenting the witnesses on their extraordinary individual tales and for their service to their firms. But he added, “It seems like everyone is hurting except for you.”

Eric Dash contributed reporting from New York.





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