Bankers at Goldman Sachs Group Inc. had a tumultuous 2012. The firm cut 900 jobs, promoted the fewest executives to the exalted post of partner in more than a decade and slashed the portion of revenue set aside for compensation to 38 percent from 42 percent a year earlier.
For the man at the very top of Goldman Sachs's pay pyramid, Chief Executive Officer Lloyd Blankfein, 2012 was his finest year since the boom times of 2007. Blankfein, 58, was awarded $26 million for his work last year, lifting him to No. 1 in the Bloomberg Markets ranking of the best-paid CEOs at North America's 20 largest financial companies by customer deposits.
John Stumpf, who led Wells Fargo & Co. to a record profit of $18.9 billion, ran second, at $19.3 million, Bloomberg Markets magazine will report in its July issue.
The pay of the 20 chiefs increased an average of 7.7 percent for 2012 compared with a year earlier, according to data compiled by Bloomberg. The tally is based on salaries, stock, bonuses and long-term incentive pay awarded to the CEOs for 2012.
Since passage of the Dodd-Frank Act in 2010, directors have put greater focus on linking CEO pay to performance.
Crisis Pay
"All of them are being overpaid," says Eleanor Bloxham, CEO of Value Alliance Co., a board advisory firm in Westerville, Ohio. "The bank boards still don’t have a good handle on how they should be compensating their executives."
Bloxham says directors lean too much on share performance and instead should look at how CEOs manage risk, including capital ratios that measure financial strength.
Anton Schutz, president of Rochester, New York-based Mendon Capital Advisors Corp., says he's not surprised that Blankfein was the highest-paid CEO last year.
"He was at the helm during the crisis, so I don't think he's being paid just for last year," says Schutz, whose firm has about $150 million under management, including Goldman Sachs shares. "He's being paid for bringing Goldman back. And Goldman is back."
Dodd-Frank gave shareholders a nonbinding vote over compensation, spurring them to examine more closely whether CEO pay is in line with results. In a second ranking, Bloomberg Markets compared the awards and performance of each of the 20 chiefs to determine who was the most overcompensated and undercompensated.
Performance Compensation
First, we ranked the 20 banks on each of three different measures to assess their results and size as of the end of each company’s 2012 fiscal year: total stock performance, return on common equity, and assets, including cash and investments.
We included assets, a key measure of a firm’s size, to reflect the additional challenge at giant global companies of achieving positive results compared with doing so at smaller banks that operate mainly in the U.S. or Canada.
Then, we calculated the average of the share performance, ROE and asset scores for each bank to establish an average rank for them. Finally, we subtracted each CEO's compensation standing from his or her bank's average rank. The chief with the biggest difference between the two rankings would be the most overcompensated.
Most Overpaid
Richard Fairbank, CEO of McLean, Virginia-based Capital One Financial Corp., was the most overpaid leader. Fairbank, 62, earned $17.5 million while steering a firm whose deposits almost doubled from 2008 to 2012. Blankfein was the second-most overpaid, and Stumpf took the third spot.
After the Wall Street crash of 2008, lawmakers expressed outrage over lavish paychecks given to bankers. As the Troubled Asset Relief Program handed out $419 billion in bailouts, directors initially showed some restraint. Humbled chiefs relinquished their bonuses. Blankfein took home a total of $600,000 in 2008, after hauling in $68.5 million – an investment bank record – for 2007.
By 2009, big paydays started to return, with New York-based JPMorgan Chase & Co. CEO Jamie Dimon receiving $15.2 million, compared with $1 million for 2008. Blankfein topped Dimon in 2010, earning $25.6 million, only to surrender the pay title back to him the next year. As the stock returns of the six biggest banks plunged in 2011, Blankfein and other chiefs took pay cuts.
Goldman's Method
"We strongly believe in linking executive pay to performance, and the variability of executive pay at the company over the past few years is a testament to that," Goldman Sachs spokesman David Wells said in an e-mail. "We believe that our own framework for linking pay to performance provides a more reliable and thoughtful reflection of how best to compensate senior leaders than the methodology used for this exercise."
Last year, Wells Fargo, the leading U.S. home lender, grabbed a bigger share of the mortgage market, helping Stumpf, 59, net a 7.8 percent pay raise. Wells Fargo spokeswoman Bridget Braxton said in an e-mail that the San Francisco-based bank's compensation is competitive and rewards long-term risk management.
Matt McCormick, who helps oversee $9.3 billion in assets, including Wells Fargo shares, at Cincinnati-based Bahl & Gaynor Inc., says Stumpf's pay makes sense.
"Wells Fargo is one of the dominant – if not the dominant – mortgage machines out there," he says.
Shareholder Say
The say-on-pay provision of Dodd-Frank has given shareholders a modicum of influence over compensation. Although they have approved most pay plans, investors in Citigroup Inc. rebelled against the proposed $15 million package for then-CEO Vikram Pandit.
In April 2012, shareholders, who had suffered a 92 percent decline in the stock's price under Pandit's five-year reign, rejected the bank's compensation proposal. In October, the board ousted Pandit after the New York-based firm failed to secure Federal Reserve approval to increase its shareholder payouts and Moody's Investors Service cut the bank's credit rating two levels.
Citigroup's board appointed Michael Corbat, 53, in October to replace Pandit as its chief. Directors tethered $3.14 million of his total $11.5 million in pay for 2012 to achieving long-term financial goals. Shareholders approved the plan in April.
Dimon's Cut
"Before, there was a tremendous amount of discretion and flexibility in how banks paid executives," says Joseph Sorrentino, a managing director at Steven Hall & Partners, a New York-based compensation consulting firm. "Now, there is a trend of banks aligning with shareholder interests, making sure CEOs have significant skin in the game."
Directors are showing more willingness to penalize the poor performance of their CEOs. Dimon, 57, had his 2012 compensation cut in half to $11.5 million after JPMorgan Chase traders in London lost more than $6.2 billion on a wrong-way bet on credit derivatives. A March report by the Senate Permanent Subcommittee on Investigations said JPMorgan Chase dodged regulators and filed misleading information with authorities as losses escalated on the massive wager.
JPMorgan spokesman Mark Kornblau says that the bank repeatedly acknowledged mistakes in handling the loss and that senior management acted in good faith and never had any intent to mislead anyone.
Fairbank's Performance
Fairbank, the third-highest-paid CEO, had the biggest gulf between his compensation and his firm’s average ranking.
Capital One's stock return of 37.5 percent hit the fifth spot in our tally. Charlotte, North Carolina-based Bank of America Corp. was No. 1, with a 109.8 percent increase. Capital One’s return on equity of 9.9 percent ranked 14th, well behind the leading 24.9 percent ROE of Montreal-based National Bank of Canada. And Capital One's $313 billion in assets was 12th, a fraction of the $2.36 trillion in assets at JPMorgan Chase, the biggest firm on our list.
Fairbank was the most overcompensated leader even after taking an 8.9 percent pay cut for 2012. Capital One spokeswoman Julie Rakes says that for the 16th year, Fairbank received no salary and his compensation was based on stock and tied to the company's performance.
Last year, New York-based Goldman Sachs posted its first revenue gain in three years as Blankfein navigated an industry slowdown in equities trading and dealmaking. The bank’s own bets through its investing and lending unit, which included stocks, debt and real estate, rose in value, adding to the top line.
Incentive Pay
Goldman awarded Blankfein with a 73.3 percent pay increase in 2012 compared with a year earlier. His compensation of $26 million for last year was $400,000 more than his pay for 2010.
His bank, the fourth largest by assets, posted a 43.4 percent stock return in 2012, also the fourth highest, and a 10.7 percent ROE, placing 11th. The average of these three rankings – 6.3 – was Goldman's average score. When Blankfein's No. 1 pay ranking was subtracted from 6.3, the difference – 5.3 – was the second biggest on the list, making him the second- most-overpaid chief.
Blankfein's package includes a $5 million incentive that will be paid out in three years if the firm achieves certain targets. The award can change depending on whether the company achieves a 10 percent average return on equity and 7 percent average increase in book value per share. The company’s board doesn’t include the long-term incentive plan, which began three years ago, in its own breakdown of annual executive pay.
In setting the CEO's pay, Goldman Sachs's compensation committee considered Blankfein's deep understanding of the strategic aspects of all of the bank's major businesses, according to a regulatory filing.
Goldman's Profit
Blankfein told Bloomberg TV in February that he was not satisfied with the bank's profit performance in 2012. The CEO said he and his managers still have a lot of work to do. Asked if he plans to leave Goldman Sachs after almost seven years leading the firm, Blankfein was emphatic.
"Could you imagine giving up all this? Of course not," he said. "The combination of this being who I am and what I do and having absolutely no other interests makes me think I'm going to be doing this for a while."
How We Crunched the Numbers
For the rankings, we limited our universe to the CEOs of North American banks, brokerages and consumer finance firms as identified by Bloomberg's industry classification system. The chiefs ranked represent firms with the largest customer deposits, including customer payables, as of the end of the 2012 fiscal year. Citigroup was excluded because its current CEO hadn't served for all of his firm’s fiscal 2012.
For our total compensation ranking, we included salary, stock grants and bonuses awarded to each executive for fiscal 2012. That figure encompasses restricted stock units, options, deferred cash, performance-based awards and all nominal long-term incentives that we determined correlate to the year’s performance.
U.S.-based company pay was compiled using data reported to the U.S. Securities and Exchange Commission in each firm’s annual proxy statements for the fiscal year ended on Dec. 31, 2012. Pay for CEOs of Canadian firms was compiled using data reported to the Canadian Securities Administrators in each company's annual proxy statement for its fiscal year ended on Oct. 31. Canadian compensation data were converted to U.S. dollars using the Oct. 31, 2012, exchange rate.
Overpaid, Underpaid
For our overpaid and underpaid CEO lists, we ranked the companies on each of three measures as of the end of fiscal 2012: total stock return; return on common equity, which includes accounting charges; and assets. We took assets into account because of the relative difficulty at large global firms of achieving positive results compared with doing so at smaller and more-focused regional companies.
Then we took the average of the three rankings for each firm. Finally, we subtracted each CEO’s total compensation rank from his or her firm’s average position, and the chief with the biggest difference between the two rankings was the most overpaid; the leader with the smallest difference was the most underpaid. All pay figures were rounded to the nearest 100,000.
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