Wall Street Roller Coaster Means Big CEO Paydays

Two credit card CEOs see their stock options jump by more than $34 million.

September 1, 2009, 12:35 PM

Sept. 2, 2009— -- Getting investments on the cheap earlier this year is yielding big rewards for Wall Street's top brass: Thanks to the rebounding stock market, two credit card company chief executives have seen their compensation jump by more than $34 million while 22 other top bank execs also saw rich gains, according to a new report released today.

A study by the Institute for Policy Studies has found that the value of stock options granted in early 2009 to American Express Chief Executive Kenneth Chenault rose by nearly $18 million as of mid-August. Fellow CEO Richard D. Fairbank, of Capital One, saw his stock options grow by $16.3 million during the same period.

IPS, a liberal think tank, found that Chenault and Fairbank were among two dozen executives at eight major financial institutions to see their 2009 stock options jump by a total of nearly $90 million.

"It's all pretty outrageous how they stand to turn the crisis into more windfalls," said Sarah Anderson, an executive pay analyst and one of the authors of the IPS study.

The banking industry defends stock options, or the right to buy stocks at a set price, as an effective way to give executives incentives to focus on the long-term performance of their companies instead of just short-term gains. Excessive risk-taking by short-sighted bankers is widely viewed as one of the main causes of the current recession.

Most of the stock option packages reviewed by IPS don't actually allow executives to exercise the options -- buy the stocks -- and sell them for three to five years after they were awarded. In the past, such waiting periods were often capped at just six months, said Scott Talbott of the Financial Services Roundtable, the trade group that represents the country's biggest banks.

Today, "it's not the quick quarter-by-quarter profit that executives benefit from -- it's the long-term, sustained growth of the company," Talbott said.

American Express spokeswoman Joanna Lambert said the increase in Chenault's portfolio reflects AmEx's rising share price which, she said, "is a good thing for all shareholders." The company's shares reached a low just under $10 in March and have since rocketed to over $30.

Capital One told ABCNews.com in an e-mail that Fairbank's compensation has been based exclusively on stock awards -- not cash salary, bonuses or retirement contributions -- for the last 11 years.

But critics like Robert Howell say the banks had no business awarding "boatloads of options" in the first place.

Greed or Good Business?

Financial institutions survived as "a result of federal funds being poured into shore it up," said Howell, a visiting professor at the Tuck School of Business at Dartmouth College. "These folks didn't do anything substantial to justify these 80- or 90-million dollars in rewards."

All of the firms reviewed by the IPS have received billions in aid under the government's Troubled Asset Relief Program, though at least four -- JPMorgan, Wells Fargo, Capital One and American Express -- have since returned the cash.

This year's stock "windfall" examined in the IPS report results from the firms awarding of hundreds of thousands of company stock options to top executives when stocks were sinking earlier this year. Their portfolios skyrocketed in value after stocks rebounded, with share prices on some financial stocks, including American Express and Capital One, shooting up 90 percent or more. Shares of JPMorgan, Wells Fargo and Sun Trust more than doubled.

Here is a breakdown, according to the IPS report, of the gains top executives at eight major banks saw in their stock options between early 2009 and Aug. 14 of this year:

The chief executive of Comerica, Ralph W. Babb, could also see healthy returns on his stock options -- the firm's shares rose more than 59 percent as of Aug. 14. It has not been disclosed how much Babb received in options earlier this year, the report said.

Howell argues that the banks shouldn't have started awarding stock options to executives until share prices had at least somewhat recovered.

"The idea of granting all these options at bargain basement prices is just another example of financial services industry greed," he said.

Wider Gap Between CEOs, Average Workers

The IPS study also found that last year, when the financial crisis reached its peak, financial firm chief executives still outpaced their counterparts in other businesses: The chief executives of the 20 banks that received the most federal bailout funds had an average compensation of $13.8 million last year, 37 percent more than the average pay earned by CEOs at S&P 500 Companies.

The pay gap between CEOs and rank-and-file employees, meanwhile, continues to widen: in 2008, according to the study, top executives averaged 319 times more in pay than the average American worker, compared to 30 to 40 times in the 1980s. CEOs at the 20 top bailout banks earned 436 times more.

Average Wall Street workers also bested their government counterparts on compensation: Compliance examiners at the U.S. Securities and Exchange Commission and the Federal Deposit Insurance Corporation earned roughly half of the average Wall Street employee's bonus in 2008.

Congress has taken some actions to clamp down on compensation, but most of the measures are limited only to firms that have yet to repay the government's bailout funds.

While the banking industry says compensation caps hurt companies' ability to attract and retain top talent, Anderson argues the government should do more to limit executive pay. A return to '80s pay levels would be best, she said.

"Top executives are not hundreds of times more efficient or brilliant than they were 25 years ago," she said. "It's the pay system that's gotten out of control."

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