Financial mess used to justify bank CEO bonus

Fetting, second from right, gets a bonus for a job done.

The latest wave of corporate proxy reports to the SEC brings a first -using the financial mess and a bank’s poor performance to justify giving a CEO bonus (credit goes to Michelle Leder at footnoted.org for being the first to catch it) 

The Committee noted that, since Legg Mason had a net loss for the fiscal year, there was no bonus pool under the Executive Incentive Compensation Plan. The Committee recognized, however, that the net loss resulted primarily from two items—the $1.4 billion in charges (net of taxes and related expense reductions) resulting from support for money market funds, including purchasing and reselling at a loss securities issued by structured investment vehicles, and $860 million (net of taxes) of goodwill and intangible asset impairment charges. If those two items are excluded, Legg Mason would have had net income, and the plan would have produced a total bonus pool large enough to accommodate the annual incentive awards made. 

Translation: yes we lost money, but take away the losses and we made money! 

Not only does Legg Mason justify the bonus where there shouldn’t be one according to its own compensation structure, it pats itself on the back for giving it (emphasis added):

The $1.36 million incentive award to Mr. Fetting is 52% less than Mr. Fetting’s $2.83 million incentive award for fiscal year 2008. Mr. Fetting’s total compensation awarded for fiscal year 2009, including the other long-term incentive awards discussed below, was approximately 29% less than his total compensation for the prior fiscal year. Despite the fact that Mr. Fetting’s individual performance during the year was strong, the Committee felt that these reductions were appropriate and consistent with its principle of linking pay to performance after taking into account the company’s performance metrics discussed above.

Let’s review Fetting’s crackerjack performance for which he was paid $1.86 million, including his base salary:

*Legg Mason lost $1.4 billion in fiscal 2008.

*Legg Mason’s earnings worsened much more dramatically last year than the investment services sector, the financial stocks sector and the S&P 500 (which actually grew the past year), according to data from S&P and Thomson.

*Only two of 13 Wall Street analysts following Legg Mason currently have a rating higher than hold. Four have the equivalent of sell.

*Average assets under management fell $300 billion (!) in one year, to $675 billion in the latest quarter.

*The share price has fallen from $50 to $22. 

As Fetting himself said in the company’s earnings call on May 5, “[O]ur shareholders deserve better results.”  Granted, he inherited many of the problems that made a mess of Legg’s year, but why have an incentive bonus structure at all if it is going to be set aside when time are tough? This serves only to mislead shareholders.

And Fetting’s reward for faithful shareholders in May when he said they deserve better? He cut the dividend 88% to three cents a share. Had the company directed his bonus to shareholders, the dividend would have been 33% higher, at four cents. Not a lot, but still something.