Highway Robbery You Can Bank On

Can you believe banks would top a list of companies with overpaid CEOs? Right, that's not rocket science. Bloomberg Markets recently pointed out a few places where investors can bank on highway robbery in the CEO pay realm.

Many investors might scoff at the notion that anyone should even care what these "captains of capitalism" make. However, shareholders may very well be the ones left with mere chump change when all is said and done. By this time in 2013, rose-colored glasses should be way out of fashion.

Overpaid and underperforming
Bloomberg's recent study took a look at CEO pay at the 20 largest financial entities as defined by customer deposits. The rankings assessed a set of factors to judge performance, therefore avoiding the over-simplified version that would focus on stock performance. In addition to share performance, the calculations also included return on equity assets, including cash and investments, and then compared each company's CEO compensation to the average rankings.

Oddly enough, the most famous -- or infamous -- Wall Street firms didn't take the No. 1 slot. The pay package for a McLean, Va.-based bank's CEO actually topped Bloomberg's list for "most overpaid."

According to those measures, Capital One Financial's (NYSE: COF  ) Richard Fairbank floated to the top, with $17.5 million in compensation in 2012. Bloomberg pointed out that Fairbank's pay compared to the bank's performance measures showed the greatest discrepancy.

For example, Capital One's share appreciation of 37.5% only put it in the No. 5 spot on their list. Bank of America's (NYSE: BAC  ) 109.8% increase left it in the dust. Capital One's return on equity was just 9.9%, putting it at number 14 on the list, while National Bank of Canada boasted a 24.9% ROE. Capital One had $313 billion in assets, a long shot from JPMorgan Chase's (NYSE: JPM  ) $2.36 billion in assets.

Where to cut? Not CEO pay, apparently
This is a surprising development since Capital One doesn't have nearly the reputation that other big bankers do (for good or for ill). Somehow, though, Fairbanks has been making out like a bandit without nearly as big a spotlight on his performance as Goldman Sachs' (NYSE: GS  ) Lloyd Blankfein or JPMorgan's Jamie Dimon.

Of course, Blankfein wasn't left out in the cold, according to Bloomberg's data. He took the second spot on the list of most overpaid CEOs. As a matter of fact, 2012 was his best year since pre-financial crisis 2007; his compensation added up to $26 million last year.

There's great irony attached to Blankfein's handsome rewards last year. Bloomberg issued the reminder that Goldman Sachs actually released 900 employees in that timeframe and cut down on promotions. The firm also reduced the amount of revenue it allots for compensation to 38% from 42% the year before.

Some shareholders may defend situations like these; CEOs have to make such "tough decisions," after all. But should they be rewarded handsomely for them? There's a point where cuts to all areas except CEO pay is a managerial failure, through and through.

2012: An ugly year for financials
I don't believe financial stocks are good investments for average investors. They're complicated, and for anyone who remembers the financial crisis, they're risky, too. Jamie Dimon may have gotten a pass from JPMorgan shareholders in the recent vote on splitting the CEO and chairman roles at the firm, but investors shouldn't forget that his fall from grace signaled that even the reputedly smartest leaders are not infallible.

Bloomberg's data on bank CEO pay is even more interesting because 2012 actually wasn't a great year for financial companies' reputations. The London Whale controversy at JPMorgan remains at top of mind given Jamie Dimon headlines. However, let's not forget HSBC's (NYSE: HSBC  ) $1.9 billion settlement to the U.S. related to money laundering accusations.

What about the LIBOR scandal, which also put big bankers in the hot seat? Charles Schwab (NYSE: SCHW  ) sued 12 banks, including Bank of America, in San Francisco about a month ago for fraud related to LIBOR manipulation. Many investors may have forgotten, but obviously that problem isn't relegated to the past.

Bank stocks have risen among the overall market rally, but investors with long-term memories should ask themselves whether things have really changed in the years following the financial crisis.

Don't just take my word for it. Last year, Frank Partnoy and Jesse Eisinger took a look at the banking sector and wrote for The Atlantic: "Banks are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash."

One thing you can bank on: They're not looking out for you
An industry with a slew of overpaid CEOs is bad enough; such costs do impact shareholders' bottom lines, particularly when other aspects of the business are suffering, or such compensation doesn't reflect real operational performance.

In the big financial companies' cases, though, there are even more reasons to shun these entities with outrageously compensated CEOs. It's likely nothing has changed, and many of these individuals are still making bank despite inadequate controls on very real and very significant risk. In the end, many shareholders (and the public at large) may once again be left with nothing but chump change.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2013, at 9:11 PM, skypilot2005 wrote:

    Alyce,

    I read this article and thought of you:

    http://www.businessweek.com/articles/2013-05-30/cozy-corpora...

    Corporate Pay

    Cozy Corporate Directors Raise Their Pay to $1,000 an Hour

    By Diane Brady

    5/30/13

    “Is it the perfect solution? No. But the upward trends in pay, tenure, and age in the boardroom reflect the central reality that shareholders need a better process to keep boards focused on who they serve.”

    Best,

    Sky

  • Report this Comment On June 04, 2013, at 4:29 PM, TMFLomax wrote:

    Thanks so much for sharing this, Sky! Ah yes, another major issue these days... making sure directors get far more attention for what they do (or fail to do) including their compensation for what amounts to a part-time job (albeit, theoretically an important one that should serve shareholders, but too often doesn't!)

    The topic of boards of directors roles in what goes on at many companies really does need to be addressed more often (and that means I need to write about it more often!).

    Thanks again...

    Alyce

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