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 Corp. (NYSE:COF)‘s 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 Financial Corp. (NYSE:COF)’s share appreciation of 37.5% only put it in the No. 5 spot on their list. Bank of America Corp (NYSE:BAC)‘s 109.8% increase left it in the dust. Capital One Financial Corp. (NYSE:COF)’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 Financial Corp. (NYSE:COF) had $313 billion in assets, a long shot from JPMorgan Chase & Co. (NYSE:JPM)‘s $2.36 billion in assets.
Where to cut? Not CEO pay, apparently
This is a surprising development since Capital One Financial Corp. (NYSE:COF) 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 Group, Inc. (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 Group, Inc. (NYSE:GS) 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 Chase & Co. (NYSE:JPM) 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 Holdings plc (ADR) (NYSE:HBC)‘s $1.9 billion settlement to the U.S. related to money laundering accusations.