Gold and the Three Bears


Bear Stearns Chairman Cayne, CEO Schwartz, and former Co-President Spector reaped megamillions as part of their compensation packages

Just 11 months ago, Bear Stearns (BSC) Chairman Jimmy Cayne was almost a billionaire. The value of his nearly 6 million shares, boosted by gains the firm made on subprime mortgages and mortgage-backed securities, soared over $900 million. Shares in the once-high-flying company traded at nearly $160 a share. Even four months after the collapse of two Bear hedge funds, Bear's shares hadn't dipped below $100 and Cayne was still worth, on paper, more than $500 million.

Today those shares are valued at $34.5 million.

Plump Bonuses

At Bear, it was taken for granted that executives had a large stake in the company. Chief Executive Officer Alan Schwartz owns more than 1 million shares and employees own one-third of the shares outstanding. "They wanted people to have skin in the game," explained Chris Whalen of risk management consultant Institutional Risk Analytics and a former Bear employee.

But don't cry for Cayne and his cadre of Bear big shots. Their paper wealth may have disintegrated but for years leading up to Bear's collapse they had been the beneficiaries of one of the most generous compensation packages in the industry. Over five years, from 2002 through 2006, Cayne took home total compensation—salary, bonus, restricted stock, and stock options—worth a combined $156 million. Current CEO Schwartz made $141 million. Former Co-President Warren Spector, deposed after the hedge fund debacle, did the best of them all, reaping $168 million.

The biggest chunk of pay came in the form of bonuses, which for Bear execs were relatively easily obtained. Through 2005, bonuses were based on the completion of any one of nine metrics, a tactic that virtually guaranteed that targets would be met, according to a report from independent research firm the Corporate Library.

From 2002 through 2005, Bear Stearns proxy statements show that Cayne and his lieutenants, Schwartz and Spector, took home bonuses of between $9 million and $12 million each.

"Musical-Chairs Culture"

Then came the fattest year of all, 2006. Bear's mortgage origination and other credit products grew at a 27% clip, and the company's expansion into these areas really paid off, at least for those at the top of the pay pyramid. Bear had eliminated the nine metrics for bonuses and moved to basing them entirely on one measure: return on equity, a number easily met by Bear's executives once they were on the subprime bandwagon. Cash bonuses jumped to more than $16 million for Cayne, Schwartz, and Spector in 2006.

Phone calls seeking comment from the Bear executives were not returned.

The pay packages instantly become prime examples of why some critics decry corporate "pay for performance" setups: When it turns out corporate performance was jacked up by unsustainable means, few companies go back and adjust executives' pay downward. Despite the ignominious end to one of Wall Street's storied institutions, there are no clauses calling for the return of Bear executive bonuses. Cayne, Schwartz, and Spector will get to keep their money, a circumstance decried by the Corporate Library. "If you don't have callbacks," said Corporate Library's Nell Minow, "it perpetuates a musical-chairs culture where you hope your check clears before the music stops."

There is little such hope for Bear's biggest shareholders. Money manager Barrow Hanley Mewhinney & Strauss, owner of 11.5 million shares, and investor Joe Lewis, with 11 million, can only smart over their enormous losses—and hope that the company winds up fetching more than $2 a share.

See BusinessWeek.com's slide show for a by-the-numbers look at Bear Stearns executive pay packages.

Levisohn is a staff editor at BusinessWeek covering finance and personal finance.

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