In October 2010, private-equity baron Henry Roberts Kravis, in one of the grandest gestures of his life, pledged $100 million to his alma mater, Columbia Business School, to help pay for the expansion of its upper Manhattan campus. His ability to throw that kind of cash around was helped by the start of trading of his buyout company, KKR & Co. (KKR:US), on the New York Stock Exchange three months earlier.
While the listing swelled Kravis’s personal wealth, it also exposed him to the rigors of the U.S. corporate reporting process. As a result, the world now knows that in 2011, Kravis was awarded $30 million in salary and other compensation by KKR’s board, Bloomberg Markets magazine reports in its July issue.
That makes him No. 1 in the Finance 50, the magazine’s annual ranking of the best-paid CEOs at the largest U.S.-based financial companies by market capitalization.
Kravis, 68, is followed in the ranking by George Roberts, his cousin and co-chief executive officer, who earned $29.9 million. The two men founded the firm with Jerome Kohlberg in 1976. The trio first worked together more than 40 years ago at Bear Stearns & Co.
Since it was founded, KKR has done more than 200 buyouts with a combined value of more than $465 billion, according to company data. The cousins’ stake in the firm was $1.22 billion in mid-April, according to corporate filings.
Average 20% Rise
Kravis and Roberts, 68, lead a list of 50 financial CEOs whose compensation collectively rose by an average of 20.4 percent in 2011 -- a year when most big banks and brokerages saw their revenues, profits and stock prices plummet. The 2011 pay rise followed a 26 percent increase in 2010 for CEOs who held the same job in both years.
In a comparison of 2011 financial CEO incentive pay against stock returns over three years, Citigroup Inc. (C:US) CEO Vikram Pandit, who was awarded $15 million in 2011, ranks as the executive who provided the least shareholder value. That award is being reconsidered after shareholders rejected it.
Berkshire Hathaway Inc. (A:US) CEO Warren Buffett provided the best value.
Financial-company boards need to take stock performance more seriously when setting executive pay, says Hugh Johnson, who oversees $2 billion, including financial stocks, as chairman of Albany, New York-based Hugh Johnson Advisors LLC.
“The performance was abysmal, and people were overpaid,” he says.
Series of Crises
Overall, 33 of the 50 biggest financial companies had negative share returns in their 2011 fiscal years, as they were buffeted, particularly in the second half of the year, by a series of crises that froze the deal markets.
In August, in an unprecedented move, Standard & Poor’s downgraded the U.S.’s credit rating to AA+ from AAA following a political battle over the nation’s debt ceiling. Investor concern mounted amid speculation about U.S. bank exposure to European debt and weak economic growth in both Europe and the U.S. A $6.3 billion bet on the bonds of Europe’s most indebted nations by MF Global Holdings Ltd. (MFGLQ:US) led to that firm’s bankruptcy.
“Last year’s performance in financial stocks reflects regulatory uncertainties and uncertainty over the follow-on effects from the European crisis,” says Stephen F. Roseman, CEO of New York-based Thesis Fund Management LLC, which invests in financial companies. “It was an incredibly complex environment.”
The ranking is based on compensation data reported to the U.S. Securities and Exchange Commission in the firms’ annual proxy statements and 10-K filings. Those numbers sometimes match, and sometimes differ markedly from, statements from the banks, brokerages and insurance companies concerning the compensation they intended to give their top executives for the work they did in 2011.
The SEC figures reflect what they actually received in 2011, some of which may be based on work they did in 2010.
In the case of PNC Financial Services Group Inc. (PNC:US) CEO Jim Rohr, who is No. 10 on the list, the SEC compensation table says he earned $16.6 million, while PNC’s proxy states that the bank’s board of directors awarded him just $8.2 million for his 2011 performance.
Over two years, one of the starkest discrepancies concerns the pay of Bank of America Corp. (BAC:US) CEO Brian Moynihan, No. 37 in the 2011 ranking. The official SEC compensation tables say he was paid $1.9 million in 2010 and $8.1 million in 2011, a year when the bank’s stock fell 58 percent.
Moynihan Pay Cut
Bank of America proxies for the two years say he was awarded $11 million for 2010 and $7.4 million for 2011, a 32 percent pay cut.
In the case of Goldman Sachs Group Inc. (GS:US) CEO Lloyd Blankfein, who is No. 12, the SEC table lists his 2011 compensation as $16.2 million, while in a separate statement the bank said it was awarding him $12.4 million, with some of it not delivered to him until 2012. Goldman’s stock price plunged 45.6 percent in 2011.
Kravis and Roberts topped the Finance 50 list even while KKR’s shares (KKR:US) slid 5.4 percent for the year. The firm’s performance since its July 2010 NYSE listing, however, is more impressive: The company scored a 24 percent total return as of June 4. The pair has earned their pay over the years with a series of profitable private-equity deals, says Tim White, a managing partner at Dallas-based executive-search firm Kaye/Bassman International Corp.
“What they’ve been able to do is to find consistent yields, reliable yields, for their clients that maybe other private-equity firms haven’t been able to,” White says. Among KKR’s 2011 deals: the $2.4 billion purchase of Pfizer Inc.’s Capsugel manufacturing unit, and the $1 billion purchase, together with two other private-equity firms, of a 25 percent stake in Banco Santander SA’s U.S. auto loans unit.
Among KKR’s holdings is Texas power producer Energy Future Holdings Corp., which it bought with TPG Capital LLP in 2007 for $43.2 billion, making it the largest leveraged buyout ever. Energy Future, called TXU Corp. prior to the LBO, reported a 2011 net loss of $1.91 billion as gas prices fell and Texas power prices also dropped.
Kravis and Roberts’ pay, as detailed in the government filings, includes salary and carried interest, the share of profits -- usually 20 percent -- that managers take from buyout funds after distributing earnings to the pensions, endowments and sovereign funds known as limited partners.
That captures only a slice of their total compensation, however. Because of their stake in the listed company, each took home an additional $64.2 million in dividends and other distributions, according to company filings.
Kravis and Roberts declined to comment for this article.
Stephen Schwarzman, CEO of Blackstone Group LP (BX:US) and No. 48 in the Finance 50, is the only other private-equity manager on the list. The Summary Compensation Table for the New York-based company said Schwarzman received $4.96 million last year. In reality, Schwarzman took home much more. He received $74 million in distributions from funds started before the company went public in 2007 and $69.6 million in cash dividends from his ownership of Blackstone stock, according to company filings.
All told, Schwarzman received $148.5 million in pay and dividends in 2011.
Dimon Leads Bankers
The highest-paid banker in the Finance 50 is Jamie Dimon of JPMorgan Chase & Co. (JPM:US) His total compensation increased 11 percent, to $23 million, even as the bank’s stock sank 20 percent. In mid-May of this year, Dimon called his own judgment into question when his bank announced that it had lost at least $2 billion investing in synthetic credit securities. JPMorgan’s stock dropped (JPM:US) more than 10 percent in the two days after the disclosure.
“We’re accountable, and what happened violates our own standards and principles about how we want to operate the company,” Dimon said in a conference call on May 10. “This puts egg on our face, and we deserve any criticism we get.”
Dimon is No. 9 on Bloomberg Markets magazine’s ranking of financial CEOs who provided the least shareholder value during the three years from 2009 through 2011. The ranking is based on a score derived by calculating the percentage point return on JPMorgan’s stock from 2009 to 2011 for every $1 million of Dimon’s 2011 incentive pay. JPMorgan’s stock rose 10 percent in the three years covered by the ranking.
Protesting Pandit Pay
Citigroup’s Pandit leads the least-shareholder value ranking even though he agreed to take only a dollar in compensation for part of 2009 and all of 2010. His score is based on his $7.84 million in incentive pay for 2011, which was awarded to him after he kept a promise to restore the bank to profitability.
Citi, the third-largest bank in the U.S. by assets, reported a 6.4 percent full-year profit increase, to $11.3 billion, in 2011. The bank’s stock (C:US), however, has languished -- down 61 percent in the three years from 2009 through 2011.
Pandit’s pay made headlines when the majority of Citigroup shareholders, invoking the so-called say-on-pay provision of the Dodd-Frank financial-reform law, voted to reject it. The vote isn’t binding, but outgoing Citi Chairman Richard Parsons said the bank’s board would reconsider executive pay packages in light of it.
The shareholder revolt sends a stern message to the bank’s board that stock performance needs to be taken into consideration when incentive pay is awarded, says Thomas Villalta, chief investment officer at Jones Villalta Asset Management LLC in Austin, Texas.
‘Pay Is Too High’
“The message is that we’re really dissatisfied with the share price and that executive pay is too high,” says the money manager, who holds Citigroup stock in the Jones Villalta Opportunity Fund.
Buffett continues to offer the best value to shareholders. Berkshire Hathaway A shares returned 19 percent to investors from 2009 through 2011, while Buffett took no incentive pay. His personal stake in Berkshire’s A and B shares added up to more than $45 billion as of May 14.
The fight over executive pay in the financial industry won’t be resolved until shareholders see a more direct connection between remuneration and stock performance, says Michael Farr, president and founder of Farr, Miller & Washington LLC, which manages $825 million, including bank stocks.
Says Farr: “The real key is that some of the risk will be borne by the risk takers at these banks -- that they will be held accountable.”
-- With assistance from Laurie Meisler in New York. Editors: Michael Serrill, Vince Bielski.
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