Setting Salaries

Economic Crisis Forces a Re-Think

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By Father John Flynn, LC

ROME, NOV. 23, 2008 ( The deepening economic crisis is forcing financial institutions and companies to look again at the issue of executive salaries. In recent years concern over ever-higher levels of remuneration had led to widespread debate over the issue, but achieving a change in pay levels or how salaries and bonuses are determined proved to be an elusive goal.

The last few months has seen this situation change dramatically. One leading Wall Street firm, Goldman Sachs Group Inc., announced that their top executives will forgo their bonuses for this year, reported the Wall Street Journal, Nov. 17.

The most senior seven executives will only receive their base salaries, set at $600,000. For chief executive officer Lloyd Blankfein, this compares to the $68.5 million in cash and stock he took home last year.

Goldman hasn’t suffered as much as other financial organizations, the Wall Street Journal noted, but even so, its stock is down more than 60% this year. A decision is still pending on bonuses for the remaining — approximately 30,000 — employees, and the article warned that if they receive low amounts they may look for work at other better-paying companies.

Putting the issue in context, the article reported that since the start of 2002, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns have paid a total of $312 billion in compensation and benefits to its employees.

Swiss bank UBS also recently announced changes to its pay levels, reported the British newspaper the Guardian, Nov. 18. The bank’s chairman, Peter Kurer, said a new system will do away with a culture of paying out multimillion bonuses and stock options on short-term results.

UBS explained that the payout pool for its bankers and traders would be slashed this year, following a write down of almost $50 billion worth of assets gone bad, and a subsequent 6 billion Swiss franc ($4.9 billion) rescue from the Swiss authorities.

The announcement came shortly after former UBS chief executive, Peter Wuffli, renounced 12 million Swiss francs ($10.2 million) in payments he was eligible for under his contract, reported the Associated Press, Nov. 9.

»I have voluntarily renounced a total of 12 million francs that was due me under my contract,» Wuffli told the Associated Press. »High payments cannot be justified for top people who leave an enterprise suffering difficult circumstances.»


Government bailouts are one of the main factors in putting pressure on financial institutions to reduce executive salaries. Earlier this year the U.S. Congress authorized a $700 billion bailout, including stock purchases of $125 billion to shore up nine large financial companies.

»Taxpayers have lost their life savings, and now they are being asked to bail out corporations,» New York Attorney General Andrew Cuomo commented in an Oct. 24 report by the Associated Press. Cuomo has been a strong critic of high executive pay levels.

One company that received federal government support, the American International Group (AIG), agreed to freeze compensation and bonuses for its executives, reported the Associated Press, Oct. 22.

AIG chairman, Edward Liddy, wrote to Cuomo saying that no payments will be made from the $600 million compensation and bonus pool of its financial products subsidiary. The subsidiary was the main cause of AIG’s woes and its former head was eligible for a payment of $69 million.

According to a roundup of news on executive pay, published Oct. 21 by the Wall Street Journal, limits on salaries have been adopted in a number of countries. In France business leaders have adopted a code of conduct preventing excessive payments for executives resigning from ailing companies.

In Germany the government has asked top executives at banks that have received federal funds to limit their pay to no more than half a million euro. Similar limits also apply in Sweden.

In Britain prime minister Gordon Brown said that banks seeking government help had agreed to conditions that meant avoiding rewards for failed executives, according to an article published by the Guardian, Oct. 14.

As well, the Financial Services Authority, an independent regulatory body, wrote to the chief executives of the 30 largest banks and building societies saying it shared concerns that «inappropriate» remuneration schemes may have contributed to the market crisis.

Banks aren’t the only ones to find themselves under challenge for high pay. A review published June 15 by the Associated Press of remuneration for the heads of companies in the Standard and Poor 500 index showed that in 2007 the median pay package totaled nearly $8.4 million.

What drew attention was the collective pay of the 10 best-paid CEOs, who made more than half a billion dollars last year. At the same time half the members of this group were leading companies whose profits shrank dramatically.

For example, Rick Wagoner, chief executive of troubled General Motors Corp., had a pay rise of 64% in 2007, up to $15.7 million.


Opinions over what to do with executive salaries vary widely. Writing in the Nov. 12 issue of the Financial Times, Peter Montagnon, director of investment affairs at the Association of British Insurers, and chairman of the Inter-national Corporate Governance Network, warned against hasty actions.

Remuneration rules for banks and for public companies should be different, said Montagnon. Regarding the former he said that regulators may need to examine if pay systems are encouraging employees to take excessive risks for short-term gain.

When it comes to other public companies Montagnon advocated greater involvement by shareholders in order to set limits. In order to carry out this role, however, they need to have more rights and companies need to disclose more information, he recommended.

«Companies are naive to assume that they can go on indefinitely increasing executives’ remuneration at rates far faster than the rest of the workforce without provoking a political reaction,» Montagnon warned. They also have to be careful that the limits imposed do not have undesirable side effects, he added.

From Australia the former head of Woolworths argued for firm limits on executive pay, according a to a report in the Australian newspaper, Oct. 17. Paul Simons, executive chairman for two decades until 1994, said that in his day there was a strict rule that no executive, even with full bonus entitlements, could earn more than 30 times the wage of the company’s lowest-paid employee.

«If the lowest-paid adult male in a large company gets $50,000 to $60,000 a year now, then you’re talking around $1.5 million to $2 million for the chief executive,» said Simons. «That’s still a lot of money,» he noted.


Financial markets have played a valuable role in developing the modern economy, according to the Compendium of the Social Doctrine of the Church. At the same time, however, there are risks involved and the globalization of markets has increased the possibility of crises.

Therefore, the text recommends: «One of the fundamental tasks of those actively involved in international economic matters is to achieve for mankind an integral development in solidarity» (No. 373).

This solidarity means promoting the good of every person and achieving a vision that takes into account the need for an equitable distribution of resources, the Compendium explains.

What the level of executive salaries should be is just one facet of the wider task of how to reconcile the forces of economic initiative and the free market with the requirements of solidarity and the common good. No ready-made answers exist on how to achieve this harmony, but the current crisis amply demonstrates the perils of disregarding this duty.

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