Bank Of America Executive Compensation History Compared With Other Large Banks

| About: Bank of (BAC)
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Summary

Have the increases in compensation at BAC been reasonable in relation to other banks?

JPMorgan, Citibank, Wells Fargo, and USBank are used as benchmarks.

Where is the link between return on equity and shareholder returns?

Banks and Compensation

A friend, Graef "Bud" S. Crystal, wrote a book in 1992 titled In Search of Excess, an obvious parody on the Tom Peters, Robert Waterman Jr, book In Search of Excellence. I had conversations with Bud but never read the book till recently. What is amazing is that a book could have been published 24 years ago and investors not learn from it: they are giving away the store.

Crystal is no academic; he spent 25 years as a compensation analyst with Towers, Perrin, but seeing his suggestions to rein in compensation being ignored drove him to leave the business. Why didn't anyone object to the obvious? First, it wasn't in anyone's interest, except a few dissident shareholders. After all, why would a Wall Street firm support taking away money from the CEO of a client company? Frustrated, he went to U.C. Berkeley's Haas School of Business to teach and then wrote for both Forbes and later Bloomberg News.

To understand how we got to where we were today, in the 1970s, CEO compensation was based upon stock price and about 25 times the average employee. Then stocks went flat and CEOs wanted something new to reward them. So they had their compensation analysts instead compare their pay to the 'universe' of corporations with ultimately a goal of being in the 75th percentile. Do you see where this is leading… just like grade inflation in our educational system.

There were several CEOs who drew attention like Disney's (NYSE:DIS) Michael Eisner, Time Warner's (NYSE:TWX) Steven J. Ross, Apple (NASDAQ:AAPL) CEO John Sculley, and Georgia Pacific CEO T. Marshal Hahn who even got the company to pay taxes on his multi-million-dollar compensation package.

Our communication resulted from an article he wrote on Sanford Weill, Citicorp (NYSE:C) Chairman, who Crystal cited as the most overpaid CEO in America (the world?). That was based on his bank's miserable performance, and Weill, a major shareholder not being interested in capital gains to all investors but instead to his own income (if you are interested in hearing how he later brought the demise of Glass-Steagall - singlehandedly, see this). Contrary to conception, Crystal believed there should not be a cap on CEO compensation if they produced outsized profits for their shareholders.

Instead, a system of 'heads I win, tails you lose' developed in American corporations and a couple of decades later spread to the U.K. and to a lesser extent, Germany. How did that system work?

First, the CEO, not the board, chose the compensation analyst. He met with them and defined the parameters of the comparatives in the search. Never, did they include foreign companies in the same industry, and some of the companies were not even in the same industry. The key requirement was that the CEOs make more than the client. After the initial report was prepared and reviewed by the CEO, it went to the board for approval. Hearing how underpaid your CEO is from a respected consulting firm does wonders in gaining approval.

Over time as more and more packages were tweaked, they went from stock options (because those might expire worthless), to restricted stock (where the recipient receives the dividend and owns it, but can't sell it unless certain, usually low-ball goals are met. Then add-ons like paying taxes on the gains, bestowing more options if the stock goes down, with restricted stock, unless it goes to zero, it will always have some value, especially if dividends are received.

IBM (NYSE:IBM) CEO, John Ackers, added another wrinkle: Tournament Theory. It says that besides the CEO, it is best to have say five senior officers reporting to the CEO, who will all work very hard as they are in competition with one another and how they do could determine if they become the next CEO. If the CEO earns $1 million, they are paid $500,000 each, and huge bonuses as the CEO receives on a smaller but hefty scale. In annual reports, the pay of the top five officers is shown… but are they the highest paid? The requirement is that the five be decision makers… so some who make more, and are arguably more important, fly under the radar as they may report directly to the CEO, but he approves their recommendations.

The result of all this is the percentage of pay to the CEO is smaller, and thus flies under the radar. I recently posted the $77 million compensation of the top five Bank of America (NYSE:BAC) officers and someone remarked that it was a drop in the bucket of total expenses. Would they say the same of a $77 million investment that went bad? Defenders would say they have been doing a good job. Really?

Now on to a more important issue: volatility of bank stocks. Due to the cyclical nature of the economy, bank stocks have more volatile earnings. Noted bank stock analyst Harry Keefe once remarked that in the history of banking, it was a zero sum game. Which means that the only reason to own a bank stock in the long run is for the dividends, and net of inflation, very few are adequate. Thus, should executive compensation be as high, given the risk to shareholders? For the answer to that question, let's look at 2007 compensation - the year financial stocks peaked and were in decline by year end.

I stumbled upon this while Googling Bank Compensation:

2007 Comp

BAC

C

GS

JPM

WFC

CEO*

$1.5M/24.8M

$2.5M/57.4M

$600k/$70.3M

$1.0M/$27.8M

$1M/$22.9M

Sr. Mgmt

$6.2M/$76.7M

$2M/$70.5M

$3M/$322M

$1M/$27.8M

$4M/$57.4M

# Officers

7

8

5

5

6

*2007 Notes:

BAC

Lewis $1.5M/$24.8M

Moynihan $719M/$10.1M

Citi

Prince ex-CEO $1M/$15.1M

Pandit CEO $250k/

Source

Note that these awards were voted in the Proxy Statement, and while details can be tricky, anyone can find out the details and vote on them… heavily approved in 2008 while stocks were in decline. Despite shareholder loss of value, here is how the big banks management fared through 2015 per Morningstar and in all tables that follow:

Exec. Comp

BAC

C

JPM

USB

WFC

Mlns $

2015

76.98

56.00

80.12

30.67

66.69

2014

61.11

61.54

85.37

41.50

68.02

2013

59.37

72.37

86.69

27.21

65.66

2012

56.82

73.00

77.61

40.77

70.77

2011

55.91

68.46

84.67

32.77

72.62

Note that despite wide swings in bank stock prices, BAC management never had a cut in compensation - every other bank had at least two cuts, including JPM, and has been the worst performer year to date.

Here is the same data expressed as percentages:

BAC

C

JPM

USB

WFC

2015

126%

91%

94%

74%

98%

2014

103%

85%

98%

153%

104%

2013

104%

99%

112%

67%

93%

2012

102%

107%

92%

124%

97%

2011

100%

100%

100%

100%

100%

But the proof of the pudding is the return on equity (ROE):

ROE%

BAC

C

JPM

USB

WFC

2015

6.29%

8.02%

10.34%

14.13%

12.78%

2014

1.71%

3.37%

9.75%

14.87%

13.68%

2013

4.61%

7.02%

8.40%

15.73%

13.99%

2012

1.28%

4.13%

10.72%

16.41%

13.16%

2011

4.00%

6.48%

10.21%

16.01%

12.19%

How can BAC justify those compensation increases given its absurdly low ROE? I don't know, but look at how the shareholders fared (also year to date, BAC is the worst performer at -24%:

Total Return %

BAC

C

JPM

USB

WFC

S&P 500

2015

-4.81

-4.07

8.20

-2.83

1.85

1.38

2014

15.67

3.91

9.68

13.65

23.72

13.69

2013

34.45

31.83

36.1

29.26

36.19

32.39

2012

109.53

50.51

35.7

13.65

27.21

16.00

2011

-58.02

-44.31

-19.73

-2.83

-9.52

2.11

This table includes the S&P 500, and note that given the disastrous decline in 2011, it wasn't until 2013 that BAC stock fully recovered. Now imagine if you had bought BAC at $3 on 3/9/09 and sold it less than six months later at $18, missing the high by less than $1, and simply put it in Spyders. You do the math.

In conclusion, in American companies, we have lowered the bar on performance for executive bonuses while holding down the incomes of employees to cut expenses. To receive this level of compensation, one should have superior performance and as we have seen, few pass that test.

The argument for paying executives that much is they might go find a better job somewhere else. Really? With that kind of performance. Crystal notes that he has never seen any CEO of a large company whose compensation ranks in the 50th percentile. Have you?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I believe this article ties into two very recent articles on BAC: Bank Of America Just Hit A Home Run, and Bank Of America: Come On, Admit It, You Can't Lose Here, Can You?