A vigilant reader pointed out that this post had some repeats in a couple of paragraphs.....Wordpress went a little crazy when I tried to insert that table at the end. My apologies to everyone. The post is now clean.

 

Sometime back,we covered a post investigating whether financial institutions are rushing to re instate compensation and pay policies now that they were out of the emergency funding program- TARP. There were several companies that we named here that changed their compensation structure including increasing cash salaries for senior executives.

 

One more that we are adding to that list is Wells Fargo. The changes instituted at Wells affect cash salaries of top executives . These changes have caused their cash salaries to jump so steeply that it could potentially eclipse any compensation issues that ‘all-time-poster-boy-for-excessive- compensation’- Goldman Sachs may appear to have.

 

On February 26th, the Board Compensation Committee (or Human Resources Committee as it is called over at Wells), made some changes to the compensation structure of its top executives. These executives are now to be paid their full salaries in cash versus being paid partly in the form of company stock which was the erstwhile compensation structure under Wells Fargo’s Long Term Incentive Compensation Plan.

 

Back in August 2009, salaries of these executives were increased to reflect an increased percentage of remuneration in company stock , but the cash portion of their salaries remained unchanged.

 

Wells Fargo repaid the entire amount it had borrowed under the Government’s TARP program in December 2009. Following this repayment, the Board Compensation committee of Wells Fargo increased the base salaries of the same senior executives yet again but this time the increased salaries will be paid entirely in cash with no stock component. These changes will be effective March 2010.

 

From the table below, it is painfully obvious that cash salaries for these executives have significantly jumped. John Stumpf, Chairman and CEO has seen his cash salary jump from $900,000 to $2,800,000 as was the case for Mark Oman(Senior Executive Vice President and head of Home and Consumer Finance), who had announced his retirement from Wells Fargo at the end of 2009. Not only does he continue with the company, but he also received a bump of $1,400,000 in his cash salary which takes his total cash salary to $2,000,000. As everyone knows, increments for middle to lower rung managers and staff are frozen at most companies with maximum salary increases of 2% to 3%. How does one justify this kind of salary hike of more than a 100%?

 

On the other hand, Wells shares have languished around $25- $27 a share. Wells Fargo closed at $27.34 a share on 2/26/2010. It looks like popular backlash against excessive compensation as well as the threat of regulation have not deterred Wells’ Board from rewarding executives for what appears to be an execution of their usual and not any kind of ‘above and beyond’ type of job responsibilities. With all the public attention on Goldman officers and their compensation, salary changes at other financial institutions seem to be going unnoticed under the radar.

 

By now, I’m sure everybody has read about Wall Street Journal’s report on the potential sale of a hedge fund business by Citigroup to Skybridge Capital.

 

According to the WSJ article, last year Citi earmarked $715 billion in non core assets to be “sold, liquidated or wound down”. By end of last year, the amount to be sold had “shrunk” by 23%.

 

What immediately came to mind was whether Old Lane was on the chopping block as well. Old Lane is a hedge fund firm co-founded by Citigroup CEO Vikram Pandit and CEO-Institutional Clients Group John Havens. When it brought Vikram Pandit on board, Citigroup agreed to purchase purchase 100% of the outstanding partnership interests in Old Lane Partners L.P. At that time, a substantial portion of the purchase price had to be re invested in Old Lane until July 2011.

 

In 2008, Citigroup purchased all of the assets and redeemed all the interests of its investors including Mr.Pandit, Mr.Havens and Mr. Leach (Chief Risk Officer-Citigroup and investor in Old Lane). Of course, distributions made to these three individuals had to be kept invested in Citi’s Private Bank for the remainder of the period under July 2011.

 

What is striking is the difference between Mr. Leach and the other two investors in the circumstances which can trigger forfeiture of these funds. In case of Mr. Pandit and Mr. Haven, funds may be withdrawn earlier in the event that the executive dies or his employment with Citi terminates by reason of his disability or without cause or for good reason. However, in the case of Mr. Leach, these funds can be withdrawn upon termination of his employment with Citi for any reason. Any guesses as to why this difference in treatment?

 

Also, in case of Mr. Pandit and Mr. Havens a substantial portion is subject to forfeiture if the executive’s employment terminates with Citi for cause or reason before July 2011.

 

July 2011 may be some time away, but preparations might already be underway.

 

If you are interested, CNBC interviewed Skybridge partner about this potential deal here or you can watch this video.

 

A word of warning: The part about Citigroup selling its hedge fund comes at about 3.50 minutes into this 7 something minutes long video.