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Puncturing the Golden Parachute

Revisiting Executive Compensation in the Wake of Wells Fargo

 

Source: money.cnn.com
Source: money.cnn.com

In early September, news broke that Wells Fargo & Co., an American financial services company, had opened as many as two million unauthorized bank accounts in its customers’ names over the past several years. These so-called “ghost accounts” reaped unwarranted bank fees for the company and allowed Wells Fargo employees to inflate their sales figures and receive greater year-end bonuses. Details of the scandal have since emerged revealing that employees went so far as to create fake PINs and phony e-mail addresses to enrol customers in pricey banking services. While 5,300 employees have since been fired for their involvement in the scandal, many Americans view this unseemly conduct as just the tip of the iceberg. Since the Great Recession of 2008, the public has grown wary of even the slightest trace of instability in the financial system, but fear quickly turns to anger when not a single corporate executive is held accountable.

 

Recently, John G. Stumpf, the Chief Executive Officer of Wells Fargo, was summoned to Capitol Hill and alleged, with regards to the scandal, that there was “no orchestrated effort, or scheme on the part of the company.” As the U.S. Senate Committee on Banking, Housing, and Urban Affairs sifts through the debris and works out all the details, we ask the question: even without any direct involvement, how could a CEO not be aware of such massive improprieties within their own company? To me, it speaks either to incompetence or indifference. A Chief Executive sets the tone for a company and is responsible for cultivating an ethical standard that employees can live up to. This is hard to do when the culture at the bank is one of aggressive sales tactics, prompting employees to reach lofty sales goals of eight Wells Fargo products per banking household when the industry average is just five.

 

While Elizabeth Warren, a member of the Senate Banking Committee, sought to drive this point home during the questioning period of Mr. Stumpf, it will more than likely fall on deaf ears. Videos of the Democratic senator from Massachusetts excoriating the Wells Fargo CEO have made waves online, but it seems that all this commotion will amount to little more than political theatre – tough talk with no substantive reform. That isn’t to suggest that Senator Warren or anyone else in elected office is solely to blame, but eventually, something different needs to be done. It is a known fact that fines do not serve as an effective deterrent to misconduct on Wall Street. And with an army of top-notch lawyers at their disposal, it seems as though bringing criminal charges to the heads of Wall Street firms will prove a costly expense for taxpayers with no guarantee of success. A more realistic place for legislators to focus their attention might be on the issue of executive compensation, and, in particular, the obscene severance packages awarded to corporate executives.

 

The term “golden parachute” has traditionally referred to a stipulation in an executive’s contract guaranteeing a wide range of benefits, such as cash bonuses, severance pay, and stock options if the contract is terminated as a result of a takeover or merger. Since the Great Recession, however, the term has come to be more broadly applied to any situation in which an executive’s contract is terminated, including being fired. This has created a conundrum of sorts — if an executive maintains their position atop a company, they will rake in millions of dollars in salary and an assortment of other benefits, but if they are let go for whatever reason, they have a lucrative exit strategy to fall back on. This is the case with Wells Fargo and CEO John Stumpf. Mr. Stumpf stands to earn over $20 million this year alone and has a golden parachute estimated at over $100 million in pension and stock benefits that await him even if he is fired. Herein lies the issue: there is little incentive for corporate executives like Mr. Stumpf to conduct themselves ethically. As long as the value of the company continues to inflate, they continue to enrich themselves, and if things go south, they still walk away with millions. If regulators are serious about reining in the excesses of Wall Street, I believe that it will be necessary to broach the topic of executive compensation, and put an end to this idea of golden parachutes.

 

The latest development in the Wells Fargo saga is that the Consumer Financial Protection Bureau levied a $185 million fine against the company, the largest in the regulatory agency’s five-year history. Although that sum is nothing turn one’s nose up at, it amounts to what the company earns in profit in just three days. It’s getting to the point where most Americans would probably be more satisfied with an actual slap on the wrist. The story of Wells Fargo is a story we’ve all heard before: Wall Street bankers feast and run off—the financial equivalent of the dine-and-dash, except that America is left to foot the bill. Nowadays though, it’s beginning to feel routine; it’s beginning to feel as if the only thing emptier than the promises made by corporate executives are the threats made by government regulators. They say that the best time to plant a tree was twenty years ago and the second best time is right now—perhaps the same can be said about comprehensive financial reform.