Ever since Bank of America (BAC) announced CEO Brian Moynihan's $12 million 2012 pay package, much consternation has been shown among observers of the event. Indeed, here on Seeking Alpha members have complained of "unacceptable performance" and shown an unwillingness to acknowledge one simple fact; he deserves it.
Moynihan took over Bank of America in January of 2010, on the heels of the worst financial crisis since the Great Depression. Bank of America was in shambles, a mere shell of its former self, with the stock trading at $15 off of its highs of over $50. The company had experienced massive earnings declines in the wake of the financial crisis and ill-fated strategic decisions by former CEO Ken Lewis. With BAC losing money and the situation worsening by the day, Moynihan was handed the impossible task of guiding a complex, fragmented and mammoth organization through the most difficult period in its history.
In the three years since Moynihan took the helm at Bank of America, he has helped engineer an extraordinary turnaround. BAC's ability to pay a dividend was all but eliminated by Federal Reserve supervisory actions such that BAC has been paying a one penny per share quarterly dividend since early 2009. As it stands now, the consensus is that when the annual Comprehensive Capital Analysis and Review, or stress test, results come out in early March, Bank of America will once again be allowed to return significant capital to shareholders. Given that the supervisory action to take away BAC's ability to return capital to its shareholders at its discretion was only four years ago, BAC has probably reached this major milestone quicker than many would have expected. In fact, the ability of BAC to return capital via dividends and, eventually, share repurchases could be a major boost to the stock as income investors return to BAC shares.
In addition to this, Bank of America is expected to earn about $1.00 per share this year and $1.29 in 2014, up from a quarter per share in 2012 and losses in years prior to that. It is easy to see that the turnaround is in full effect at Bank of America and the earnings per share numbers are beginning to reflect that BAC's worst days are behind it. Moynihan has implemented a strategy of raising capital and deleveraging at the expense of near-term gains and profitability. Bank of America's book value is holding steady at around $20 after having declined over 50% in the years prior to Moynihan taking the helm and with profitability in the future a certainty, book value is slated to begin rising again in 2013, rewarding shareholders.
BAC has been deleveraging in terms of the loans-to-deposits ratio, which I penned a piece on here. This means that Moynihan is sacrificing near-term gains BAC could potentially make by loaning out more of its deposits but the bank has decided that a fortress balance sheet is more important to the long-term future of the company, and we can see a tremendous amount of evidence that it is working. Indeed, Bank of America's capital position at the end of 2012 was very strong:
- Basel 1 Tier 1 Common Capital Ratio of 11.06%
- Basel 3 Tier 1 Common Capital Ratio of 9.25%
- Long-term debt decreased by $96.7 billion in 2012
The point is that Moynihan and his team have done an extraordinary job of taking a bank that had nearly gone out of business during the financial crisis and turning it around by returning to core banking business lines and making sound, long-term-oriented decisions.
All of that is great but how much is Moynihan getting compared to his too-big-to-fail bank CEO brethren? Here is a sampling of the CEO's who have jobs that are most comparable to Moynihan and their respective recent pay packages.
- JPMorgan's Jamie Dimon - $23.1 million for 2011, $11.5 million for 2012
- Citi's Michael Corbat - $11.5 million for 2012 (after only months on the job)
- Morgan Stanley's James Gorman - $9.8 million for 2012
- Goldman Sachs' Lloyd Blankfein - $21 million for 2012
- Wells Fargo's John Stumpf - $19.8 million for 2011
As you can see, Moynihan's pay package is right in line with his peers and some would argue that since the stock has more than doubled since the start of 2011 that maybe he is a bit underpaid. I don't believe he is underpaid by any means but I also don't think he is overpaid either. In addition, most of his pay is in stock incentives, tying his interests to that of long-term shareholders. Copious research has been performed on the link between tying executives' pay to the performance of the stock and it is a commonly accepted way to align shareholders' interests with that of management. BAC recognizes this and has decided to pay Moynihan with stock so that his personal wealth will accumulate alongside shareholders' wealth.
So enough already with complaining about how much Moynihan makes; the bottom line is that his tenure on the job and the fact that BAC is in such a strong position in its turnaround phase warrants a nice pay package. Moynihan has engineered an extraordinary turnaround at BAC since he took over and as we saw earlier, EPS is expected to quadruple this year and gain another 30% in 2014. I don't mind paying a CEO for that kind of production.