Earlier this week, AFLAC Incorporated (NYSE: AFL) became the first publicly traded U.S. company to have a vote on its executive compensation.

In an outcome that speaks volumes about the company and its leadership, 93% of shareholders approved of CEO Daniel Amos' $11.96 million compensation package - with only 3% voting against it.

Such results are not surprising given that in Amos' 18 years at the helm AFLAC shares have risen more than 3,000%.

However, even if shareholders had overwhelmingly disapproved, such "say on pay" votes are only a barometer of sentiment. The company's compensation committee still has final decision power over pay.

Even though the vote only cheered the status quo, it is an important symbolical step for a U.S. company - and the results of such votes in the future at companies that don't have stellar share performance might be less than glowing.

"Washington Mutual Inc., the nation’s largest savings and loan institution, was so badly burnt by the mortgage meltdown that it needed a $7 billion infusion of capital from the private equity firm TPG Capital and other investors to stay independent.

Although the Seattle-based thrift may ultimately still not survive, Kerry Killinger, its chief executive officer, will do just fine, thanks to the largesse of the board, which approved a compensation structure shielding senior management from the impact of the mortgage crisis.

Killinger received more than $14 million in compensation in 2006. Although he refused a bonus in 2007 because of the company’s poor performance, the 2008 proxy reveals that Washington Mutual more than made up for that by giving Killinger a hefty grant of stock and options awards valued at close to $13 million. This was on top of a base salary of $1 million, proving that the alignment between pay and performance is completely broken.

Washington Mutual also is protecting the compensation of its senior managers in the current year from any hits from the mortgage crisis. The thrift changed the performance measures of its 2008 bonus plan to exclude the effects of loan loss provisions, expenses related to business resizing or restructuring and expenses related to foreclosed real estate assets.

This at a time when Washington Mutual reported that it would lose $1.1 billion in the first quarter of 2008 and set aside a provision for loan losses of $3.5 billion. The thrift also said it would slash its quarterly dividend from 15 cents to a penny and give pink slips to 3,000 employees.

CreditSights Inc. warned on March 27 that the company could lose $4.2 billion this year due to increasing losses on mortgages and may have to raise at least $3 billion in capital to meet federal regulatory requirements.

The dilution from the infusion of capital by TPG and other investors is further punishment for Washington Mutual’s shareholders who had already lost 70 percent of their investment in 2007 and seen their dividend slashed by 73 percent.

The company’s biggest stumble “was a late entry into the subprime market as a way to juice the once fast-growing company’s sluggish earnings,” The Wall Street Journal noted. Despite a series of missteps by Killinger, the board approved an executive compensation structure to protect his pay package and that of other senior managers from the impact of the mortgage crisis.

Killinger’s 2008 equity award will be approximately 15 percent greater than his 2007 award and consist solely of performance-vesting stock options. Stock option grants provide senior executives with incentives to enhance the stock’s short-term performance to the detriment of long-term shareholders. Stock option grants promise executives all the benefit of share price increases with none of the risk of share price declines.

In an April 4 report, RiskMetrics Group’s ISS Governance Services recommended that shareholders support a campaign by the AFSCME Pension Plan and the CtW Investment Group to vote at the April 15 annual meeting to throw out all the directors on the board finance committee. The proxy voting service also called for shareholders to support the installation of an independent chairman and for the requirement that directors get a majority of the vote for election to the board.

The RiskMetrics report also questioned Killinger’s continued leadership. “Given the magnitude of the company’s losses and recent changes in the executive suites at Citigroup and Merrill Lynch, we question why the board did not replace Mr. Killinger as CEO, particularly given the critical strategic decisions that the company still faces.” Washington Mutual decided in 2006 to focus its mortgage business increasingly on higher-margin products, despite the recognition by analysts of the risk “inherent in the mortgage franchise.” These higher-margin products include option payment adjustable rate mortgages, alt-A loans and below prime loans. These higher-margin loans also are riskier. Among the largest U.S. mortgage lenders that year, Washington Mutual also made the highest proportion of loans to real estate investors and second-home buyers. Such loans are considered especially risky.

Not only did Washington Mutual increase lending to risky borrowers, it may have done so in questionable ways. Last November, New York Attorney General Andrew Cuomo filed a lawsuit against eAppraiseIT, the appraisal arm of First American Corp., alleging that it inflated the value of homes nationwide in response to pressure from Washington Mutual. Cuomo’s lawsuit also attracted the attention of the U.S. Securities and Exchange Commission and the Office of Thrift Supervision.

Appraisals ascribe a value to property that determines the amounts that banks are willing to lend to the buyer. Mortgage brokers and lenders then collect fees based on the dollar value of the loans they make to the buyer of the property.

This means that in addition to its involvement in what is possibly illegal activity, Washington Mutual has a mortgage loan portfolio of lower quality than previously thought to be the case. The company now faces a higher risk of credit losses as homeowners are stuck with homes whose true value is much less than they thought and with mortgages they can’t pay.

Washington Mutual’s aggressive lending practices began to reveal their true value when losses began to mount. The company reported a $1.87 billion loss in the fourth quarter of 2007. Moody’s Investors Service cut the company’s credit rating to a notch above “junk.” The lower credit rating indicates that investing in Washington Mutual is considered to carry a higher risk than before. Toward the end of 2007, the company announced it would lay off 3,300 of its 50,000 workers.

Instead of properly monitoring risk, Washington Mutual has followed lending practices that make risk more difficult to identify and structured management’s compensation to sidestep the consequences, a scary proposition considering that further write-downs are expected. According to some estimates, the company will need $8 billion to cover borrowers who can’t afford their mortgage payments, although Moody’s estimated that the company might need as much as $12 billion.

And what if Washington Mutual goes the way of Bear Stearns or Countrywide? Killinger should have no worries, with a golden parachute worth more than $22 million, if he is terminated before a change in control."

"The nation’s fourth-largest bank is a bellwether for the mortgage crisis, says Jonathan Weil, an accounting columnist at Bloomberg News. “As long as Wachovia Corp. hasn’t cleaned up its books, there’s probably still more to come,” he says.

Weil says it’s clear that Wachovia hasn’t yet fully disclosed the impact of delinquent mortgage loans on its financial statements because the stock market value of the bank is less than its book value, or net worth. At the end of 2007, the bank’s book value (assets minus liabilities) was $76.9 billion, but its stock market value was only $60.9 billion. “The $16 billion gap shows the market doesn’t believe the company’s balance sheet is holding up,” Weil says.

The banking company’s net income in the fourth quarter of 2007 plunged to $51 million or three cents a share, from $2.3 billion or $1.20 a share a year earlier, and its revenue fell 17 percent to $7.2 billion. Mortgage-related losses were $1.7 billion. Its non-performing assets soared to $5.4 billion on Dec. 31, 2007, from $1.4 billion a year earlier. But the bank’s loan-loss allowance, or the money set aside to cover bad loans, now $4.5 billion, is not large enough to fully cover its non-performing assets.

Despite the bank’s financial woes, G. Kennedy Thompson, chairman and chief executive officer of Wachovia Corp., hasn’t suffered as much financially as the company’s shareholders. Thompson didn’t receive a $5 million cash bonus in 2007 that he got in 2006, but Wachovia granted him stock options and restricted stock with a combined grant date fair value of $14.3 million. This represents a $2.5 million increase or 21.1 percent more than the $11.8 million in equity awards he received in 2006.

Thompson’s compensation illustrates the truism that chief executive officers of large companies typically earn bigger paychecks than heads of smaller companies. The bigger paycheck frequently tempts CEOs to outgrow their competitors through mergers and acquisitions, rather than seeking to financially outperform their competitors. All too often, executives may pursue acquisitions to grow their companies even if the resulting transactions are risky, or poorly conceived. This is what the executives did at Wachovia.

Growth for growth’s sake can be a particularly destructive strategy at a bank, especially if it results in the making of poor quality loans. The banking company, cobbled together from more than 100 acquisitions since 1985, is now the fourth largest bank in the United States. Wachovia executives had financial incentives to pursue this expansion because the company’s executive compensation plan rewards executives for the revenue growth that results from mergers and acquisitions.

As Wachovia has grown, so too has the size of the companies that it considers its peers for executive pay. Like many companies, Wachovia looks at its peer group of rival companies to establish its executive compensation levels. A decade ago, the company, then known as First Union, used the top 25 largest banking companies as an executive compensation benchmark. Today, Wachovia’s compensation committee considers 10 of the largest financial services companies.

Peer group compensation formulas can provide cover for executives when industry-wide problems emerge such as the current mortgage credit crisis. In 2007, Wachovia’s compensation committee concluded that despite Wachovia’s financial exposure to the decline in value of subprime residential mortgages, its peers also had taken significant write-downs.

In May 2006, Wachovia announced the purchase of mortgage lender Golden West Financial for $24 billon. At the time, Thompson praised Golden West for its “singular focus as a risk-averse residential mortgage portfolio lender.” The merger was completed at the peak of the real estate bubble, and since then Wachovia’s stock price has fallen more than 40 percent.

Golden West specialized in offering so-called “option ARM” mortgages that allowed borrowers to select a minimum payment option below the amount of interest due. Golden West often combined these loans into mortgage-backed securities for use as collateral to borrow more money. Adding to the company’s risk, more than 60 percent of Golden West’s outstanding mortgages originated from California, where real estate values reached what many people suspected were unsustainable levels.

Wachovia’s expansion in the residential mortgage business could not have come at a worse time. As the mortgage credit crisis spread in the fourth quarter of 2007, Wachovia’s deteriorating loan portfolio required an increase in its loan-loss provision to $1.5 billion. Wachovia’s quarterly net income fell 98 percent, as its bad loans and delinquencies increased. Unfortunately for shareholders, Thompson has not been penalized for the consequences of the ill-conceived expansion strategy."

"John J. Mack, chairman and chief executive officer of Morgan Stanley, received $41.7 million in compensation in 2007, a year in which the prestigious Wall Street firm reported the first loss in its 72-year history because of a $9.4 billion charge on subprime related investments. Under his employment contract, which expires in 2010, Mack also is entitled to tax gross-up benefits, as well as continued medical and dental benefits.

Mack did not receive a bonus in 2007 because of the company’s losses related to the mortgage crisis, but he did receive stock awards valued at $40.1 million and $399,153 of other compensation on top of his $800,000 salary, according to the company’s 2008 proxy.

Among the chief executives of Wall Street firms that have taken a major hit from the subprime mortgages, he is the only one who has kept his job. Despite an effort by the CtW Investment Group, the California State Teachers’ Retirement System and other large investors to toss him from the board, Mack was re-elected as chairman at Morgan Stanley’s April 8 annual meeting. The write-downs led to a 44 percent decline in Morgan Stanley’s share price that erased $35 billion in shareholder value for the year ending March 7, 2008.

When he was brought back to lead Morgan Stanley in 2005 after a management feud threatened to tear apart the firm, Mack promised to double earnings in five years. The firm’s $3.59 billion loss for the fourth quarter of the fiscal year ending Nov. 30, 2007, forced Mack to renege on his promise and sent Morgan Stanley hat in hand to a Chinese investment firm for $5 billion infusion of capital.

In a press release announcing the loss on Dec. 19, 2007, Mack called the write-down “deeply disappointing, and agreed to forgo the year-end bonus. But instead of accepting ultimate responsibility for Morgan Stanley’s performance, he blamed the “isolated losses” on a “small trading team.” In a conference call with investors about the earnings, Mack said the firm’s losses “resulted from an error of judgment that occurred on one desk, in our fixed-income area, and a failure to manage that risk appropriately.” 

That trade represented 23 percent of the firm’s common equity in fiscal 2006 and prompted Moody’s Investors Services to raise questions about the “effectiveness of Morgan Stanley’s trading risk management.”

In fact, much of the blame for the firm’s losses rests with Mack. Shortly after returning to lead Morgan Stanley in 2005, he pushed the firm to take more risk and bet more of its own money on big trades and investments, a strategy that prompted the company to dive deeply into subprime mortgages, leveraged loans and derivatives and backfired badly. Mack also compromised the independence of the firm’s risk management by having the chief risk officer report to Zoe Cruz, co-president, who also oversaw fixed income trading, instead of reporting directly to him.

After the firm’s 2007 trading losses came to light, Mack fired Cruz and said the firm’s risk managers would now report to the chief financial officer. “Mack’s strategy is to be aggressive and use the balance sheet to support businesses that he’s expanding,” said Dick Bove, financial strategist at Punk, Ziegel & Co. “It’s not working and management turnover is excessive.”"

"While working Americans are struggling to make ends meet, corporate chief executives who lose their jobs walk away with outsized pay packages. “When companies fail, should they give millions of dollars to their senior executives?” Rep. Henry Waxman, chairman of the U.S. House Oversight and Government Reform Committee, asked during a hearing featuring E. Stanley O’Neal, former chief executive of Merrill Lynch & Co. Inc., and two other top executives at the center of the financial crisis.

O’Neal lost his job as chairman and chief executive of Merrill Lynch last October, after the firm posted a $2.24 billion third-quarter loss due to a staggering $8.4 billion write-down on investments in junk mortgages and risky debt securities. The Wall Street firm posted an $8 billion loss for 2007 and shareholders saw the value of their shares drop more than 40 percent.

Yet O’Neal left with stock options, unvested shares, deferred compensation and pension payments worth more than $160 million. But O’Neal told lawmakers at the hearing that “I received no severance package. I received no bonus for 2007, no severance package, no ‘golden parachute.’” Instead, he said what he received was earnings from earlier years.

Much of this amount is in the form of unvested restricted stock and unexercised stock options granted over the six-year span of O’Neal’s tenure at Merrill Lynch. During this period, Merrill Lynch failed to outperform the Standard & Poor's (S&P's) 500 on an annual basis. The discrepancy between O’Neal’s generous compensation and his lackluster performance that led to some of the largest quarterly losses in his company’s history points to an executive compensation program that lacks accountability and rewards short-term gains at the expense of long-term value.

A look at Merrill Lynch’s proxy statements over O’Neal’s tenure as CEO shows that his compensation was not tied to risk-adjusted performance measures. Instead, it was driven by revenue, earnings growth and return on equity. The company’s 2007 proxy statement placed a high priority on return on equity. Such incentive compensation that is based on earnings and revenue, can “push for ‘sales’ without adequate concern for quality,” according to Nell Minnow, co-founder and editor at The Corporate Library, a corporate governance research firm. This can lead to CEO pay based on artificially inflated numbers.

The consequences of this lack of risk accountability can be seen in the direction the company took during O’Neal’s tenure. Since taking over, O’Neal slowly pushed Merrill Lynch into riskier businesses, in his quest for higher returns. During the housing boom, Merrill Lynch became increasingly involved in packaging and selling pools of securities tied to subprime mortgages, eventually increasing its exposure to these collateralized debt obligations (CDOs) to more than $40 billion in late 2007. CDOs repackage income from a pool of bonds or other investments.

Merrill Lynch became involved in the packaging and selling of a particular type of CDO called “Norma” that bet heavily on securities that were among the most vulnerable to a rise in defaults of subprime mortgage loans. While this increased returns, it also increased the chances that losses for investors would be magnified in the future. In underwriting risky CDOs such as “Norma,” Merrill Lynch earned fees as high as $15 million for a typical $1 billion CDO. From 2004-2007 Merrill Lynch became the top underwriter of CDOs and generated hundreds of millions of dollars in profits from packaging and selling mortgage CDOs.

These profits helped take O’Neal’s annual compensation to high levels. In 2006, at the height of the real estate bubble, he was paid $91 million. However, according to critics, Merrill Lynch’s high-risk strategy created little value for investors or the broader economy.

Once the housing bubble burst, home prices began to fall and defaults on mortgages rose. The value of subprime backed securities and CDOs such as “Norma” began to fall quickly. Financial instruments such as “Norma” became responsible for the tens of billions in write-downs at some of the world’s largest banks, including Merrill Lynch.

In the face of large losses, O’Neal approached Wachovia Corp. with a merger offer that was not authorized by Merrill Lynch’s board of directors. If this merger had been completed, O’Neal might have walked away with as much as $274 million. In the end, the merger did not go through, and ultimately O’Neal was forced out. Still, he made out well, walking away with $161 million.

Merrill Lynch shareholders are left with the consequences of O’Neal’s risk-taking. According to some analysts, the firm still faces uncertainty about its future and has sizable exposure to "some of the most toxic assets in the marketplace.""

"Countrywide Financial Corp., once the nation’s biggest home lender, which originated more than $450 billion in mortgages annually, or about one-fifth of all home loans, embodies the subprime mortgage crisis more than any other company.

“It seems like CEOs hit the lottery even when their companies collapse,” said Rep. Henry Waxman, the California Democrat who chairs the U.S. House Oversight and Government Reform Committee, at the March 7 hearing on CEO pay and the mortgage crisis. No CEO epitomizes that better than Countrywide Chairman and Chief Executive Officer Angelo Mozilo.

At the mortgage lender, stock-option compensation rewarded executives for short-term stock performance even while they pushed lending practices that were not sustainable over the long run. During the height of the real estate bubble between 2004 and 2007, Mozilo cashed in on these short-term gains by exercising stock options valued at $414 million, prompting an informal U.S. Securities and Exchange Commission (SEC) investigation into the sales. As a result, he already had pocketed a tidy profit by the time the long-term consequences of his decisions finally caught up with the company’s share price.

In 2004, Countrywide became the largest U.S. mortgage lender, in part, by using aggressive sales techniques and by lowering lending standards. Like other lenders, Countrywide also introduced exotic mortgages that allowed borrowers to qualify for larger mortgages. As the housing boom peaked in 2005, an increasing percentage of Countrywide’s borrowers were sold “pay option ARMs,” a nontraditional mortgage the lender first offered to its borrowers in 2001.

A pay option ARM is an adjustible rate mortgage loan that allows the borrower a choice of payment methods, including a minimum payment option that is less than the interest owed. Borrowers who select the minimum payment option have the difference between the interest they owe and the interest they actually pay added to their outstanding loan balance each month in a situation known as “negative amortization.” Over time, borrowers who pay the minimum payment also face elevated interest rates.

As the real estate bubble deflated in the second half of 2007, Countrywide suffered $1.6 billion in mortgage-related losses. By the end of the year, more than 5 percent of Countrywide’s $28.42 billion in pay option ARMs were at least 90 days overdue and 71 percent of its pay option ARM borrowers were making minimal payments. Countrywide also disclosed that only about one-fifth of its borrowers had fully documented their incomes before receiving the loans.

In August 2007, deteriorating credit market conditions forced Countrywide to seek outside financial help by selling $2 billion in convertible shares to Bank of America. As the mortgage credit crisis worsened, Countrywide risked losing both its investment-grade rating and also violating its bank loan covenants. In January 2008, Countrywide announced a $4 billion merger with Bank of America, at a loss of $20 billion in market value from the previous year.

Before this end-game transpired, Mozilo had doggedly bargained a very lucrative employment agreement at the end of 2006, despite the vocal criticism it received. In fact, in an e-mail to Countrywide’s compensation consultant, Mozilo complained that “Boards have been placed under enormous pressure by the left-wing, anti-business press and the envious leaders of unions and other so-called “CEO Comp Watchers.” At the time, Mozilo also proposed to collect a $3 million pension while he remained an employee of Countrywide.

On the Friday before Christmas 2006, Mozilo and Countrywide finalized his new employment agreement. The annual pay terms included a base salary of $1.9 million, an incentive bonus of between $4 million to $10 million, an equity award of $10 million and continuation of Mozilo’s other perks and fringe benefits. The new contract also promised him the $37.5 million in severance benefits.

But when the financial success that made it possible for him to get such an employment agreement proved so fragile that the entire company had to be sold at a fraction of its previous market capitalization, Mozilo could no longer avoid making some concessions. Facing growing public criticism, Mozilo announced that he would voluntarily give up his $37.5 million golden parachute that he would receive when Bank of America completed its acquisition of Countrywide. Reflecting the changed financial conditions, the company also canceled its plans to host a ski trip for mortgage bankers at the Ritz-Carlton ski resort in Avon, Colo., where rooms start at $725 a night. The itinerary reportedly included dinner at Spago, the famous restaurant whose menu includes Kobe steak as an entrée for $105.

But Mozilo will not be leaving Countrywide empty-handed. He is entitled to an enhanced supplemental executive retirement plan with a lump sum worth $22.4 million, a pension plan with a present value of $1.3 million and $20.6 million in deferred compensation. And while Countrywide shareholders have seen the value of their investment fall 85 percent since February 2007, Mozilo also will keep his $414 million in stock options that he exercised between 2004 and 2007. On top of that, Mozilo, who intends to retire after Bank of America Corp.’s (BAC's) pending takeover of Countrywide this year, will receive $10 million worth of stock in BAC, according to filings with the SEC."

Goldman Sachs (NYSE: GS) chief executive Lloyd Blankfein received $74 million last year, but nobody can be heard calling for his head. The 53-year old Blankfein may have made $314,894 per day in 2007, but his success in avoiding the subprime collapse (and even profiting from it!) saved the company billions.

Surprisingly, some investors are still pushing a say-on-pay proposal that prompted the executive to go on the offensive. In fact, the executive commented that he didn't want anyone "less sophisticated" in the financial industry making decisions on his pay. And perhaps he is right, since he already appears to be one of the most underpaid on Wall Street.

Blankfein and his predecessor Hank Paulson were paid a total of $136 million between 2003 and 2007 while the firm racked up $34.3 billion in profits. The pay as a percentage of profits came in at just 0.4%, which is one of the lowest ratios on Wall Street. As a comparison, Bear Stearns' CEO made 2.2% of its profits over a five year period.

Still many investors and shareholder advocates are insisting that unearned compensation should be returned to shareholders. Whether or not this is fair compensation given the history of these executives remains to be seen.

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"Charles O. Prince resigned as chairman and chief executive officer of Citigroup last November, after accepting responsibility for the bank’s $5.9 billion write-down related to its exposure to risky mortgages that led to a 57 percent drop in its third-quarter profits. “Given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as Chief Executive Officer is to step down,” he said, in a Nov. 5, 2007, press release announcing his resignation.

Yet, when he walked away, he received a compensation package that was larger than what he received in 2006. His 2007 compensation included $1 million in salary, $1.5 million in annual perquisites for five years and a discretionary bonus of $10.4 million. Although Prince, who spent his entire career at Citigroup, had no employment contract, the board let him retain more than $28 million in unvested stock and options that became vested immediately. Prince can exercise the options over the next two years, in keeping with his separation agreement. He also received pension and retirements benefits with a present value of $1.8 million.

Shortly after Prince departed, Citigroup posted a loss of $9.83 billion for the fourth quarter of 2007, the biggest loss in its 196-year history, after rising defaults forced the company to write down the value of its mortgage portfolio. The nation’s largest bank cut its dividend for the first time and was forced to seek a $12.5 billion infusion of cash from foreign investors.

In January, the new CEO, Vikram Pandit, announced the bank would lay off 4,200 employees globally. By March, Citigroup’s stock had plummeted to its lowest level since 1998, dropping to around $22, amid concerns the bank might have to seek more capital from foreign investors again.

Under pressure from the AFL-CIO over its risk management practices, Citigroup said that C. Michael Armstrong, would step down as chairman of its audit and risk management committee this summer. Armstrong, who has headed the committee since 2004, oversaw more than $22 billion in write-offs from mortgage-related investments by Citigroup. The chairmen of other board committees also will step down as part of a new rotation policy, Citigroup said.

The Corporate Library, a corporate governance research firm, gave Citigroup a D rating, citing concerns about Prince’s compensation package despite the company’s poor performance. Even so, Prince maintained that "Citigroup has worked hard to align management’s interests with the interests of shareholders."

The company’s 2008 proxy reveals that may be far from the case. Citigroup’s Personnel and Compensation Committee uses the Independent Compensation Committee Adviser LLC (ICCA) to review the compensation of its top executives and ensure that it is competitive with the pay packages of a group of peer companies. But the committee cited the mortgage meltdown as reason not to benchmark its 2007 executive compensation to that of peer companies, thus flying blind in making compensation decisions.

Citigroup’s proxy notes that "ICCA concluded that in light of the extraordinary financial upheavals that occurred at the end of 2007, there was limited meaningful guidance regarding contemporary compensation practices, as compensation data from 2006 and 2007 compensation surveys became an unreliable predictor of actual competitor compensation practices for 2007."

Prince became CEO of Citigroup on Oct. 1, 2003, and resigned Nov. 5, 2007. During his tenure, Citigroup’s total return was –2.5 percent a year, compared to a 12 percent a year return for the Standard & Poor’s (S&P's) 500 index during the same time.

The company’s stock closed at $29.44 at year-end, and shareholders lost 43.27 percent in 2007, compared with a –25.68 percent return for peers, and 5.15 percent return for the benchmark S&P 500. The company’s performance also lagged that of peers and the benchmark S&P 500 over the three-year and five-year periods ending Dec. 31, 2007."

UnitedHealth Group Inc. (NYSE: UNH) executives may soon find themselves under fire after an investment firm suggested that shareholders have a non-binding say on executive compensation. These plans are designed to put pressure on boards to reduce executive compensation by demonstrating shareholder sentiment, and are typically frowned upon by management as a result.

Walden Asset Management, a large UNH shareholder, intends to introduce the proposal at the health insurer's annual meeting in June. The proposal was also co-sponsored by a number of additional organizations, including Tides Foundation, the Funding Exchange network of social justice foundations, the Sisters of St. Joseph of Boston, and Gun and Thomas Denhart.

The shareholders demand that the board allow investors to vote on an advisory resolution to approve the compensation of top executive officers. The move follows more than 60 similar proposals put forth in 2007 alone, averaging a 43% vote. Unfortunately, only eight of the resolutions actually received the majority vote needed to pass.

"We believe that existing U.S. corporate governance agreements...do not provide shareholders with sufficient mechanisms for providing input to boards on senior executive compensation," Walden Asset Management said in a statement, disclosed in UnitedHealth's Schedule 14A proxy statement.

The AFL-CIO's "2008 Executive PayWatch" ends with examples of extravagant executive pay in firms that contributed to the on-going U.S. mortgage crisis. The first such look is Bear Stearns CEO James Cayne:

"The near-collapse of the Wall Street firm Bear Stearns Cos. Inc. illustrates the danger of focusing executive compensation on company performance without considering the amount of risk undertaken to achieve that performance. Much of the risk that executives undertook was hidden on the firm’s balance sheet until the mortgage crisis revealed the true worth of the assets was considerably less than their book value. Bear Stearns narrowly avoided bankruptcy by agreeing on March 16 to a shotgun marriage with JPMorgan Chase & Co., presided over by the federal government. The price? A mere $236 million, a fraction of Bear Stearns’ previous stock market value of $20 billion in January 2007.

Under pressure from Bear Stearns employees and shareholders JPMorgan Chase increased its bid on March 24 from $2 to $10 per share. Bear Stearns CEO James Cayne, who held 5.82 percent of the investment bank’s total outstanding shares, was one of the biggest beneficiaries of the increased price. A day after Bear Stearns’ directors agreed to the increased offer from JPMorgan Chase, Cayne unloaded his entire holdings at $10.84 a share, creating a $61.3 million profit.

Given Bear Stearns’ reputation on Wall Street for savvy risk management, it is ironic that Bear Stearns’ own hedge funds helped trigger the subprime mortgage meltdown that ultimately cost the firm its independence. In June 2007, Bear Stearns bailed out two of its troubled hedge funds that had invested in collateralized debt obligations. By combining subprime loans into a single security, these collateralized debt obligations supposedly transformed high-risk debt into investment grade credit ratings. The financial pages of the past year show that this kind of magical transformation is illusory.

The Wall Street Journal described the fire-sale price of Bear Stearns as having “shaken American capitalism.” In a deal orchestrated by Treasury Secretary Henry Paulson, the Federal Reserve agreed to lend JPMorgan Chase up to $30 billion in exchange for liquid mortgage securities held by Bear Stearns. The bailout was the first time since the Great Depression that the Federal Reserve lent money to a company that was not a bank.

In many ways, the near-collapse of Bear Stearns resembled a classic “run on the bank” financial panic from the 1930s. As concerns about the quality of its subprime mortgage investments spread, Bear Stearns could no longer raise short-term funds by selling mortgage-backed assets on the securities repurchase market. When rumors spread that Bear Stearns could become insolvent, many of its lucrative hedge fund clients began pulling their prime mortgage accounts.

Facing criticism for his hands-off approach to the mortgage credit crisis, Cayne announced his resignation as CEO in January 2008. While Bear Stearns’ hedge funds were losing more than $1.6 billion last summer, he was busy playing golf and at a bridge tournament. Both the U.S. Securities and Exchange Commission and the U.S. Attorney’s office are investigating the collapse of the Bear Stearns' hedge funds.

Cayne’s compensation peaked at the height of the real estate bubble. In 2006, he received a $17 million bonus, $14.8 million in restricted stock, $1.7 million in stock options and more than $6.1 million in other compensation, including preferential earnings under the Capital Accumulation Plan for executives. The compensation committee determined the size of the 2006 executive bonus pool based on Bear Stearns’ after tax return on equity. Cayne did not receive any bonus or units under the Capital Accumulation Plan last year. But he realized $10.3 million from vesting stock awards in 2007.

In hindsight, it appears that Cayne’s compensation was not adequately tied to risk-adjusted performance measures. For example, Bear Stearns’ decision to link executive pay to return on equity can encourage executives to use increased leverage. The board of directors may not have paid sufficient attention to the amount of mortgage-related risk that Bear Stearns was undertaking as it did not establish a finance and risk committee until Jan. 10, 2007.

The real estate crisis hasn’t been all bad news for Cayne. He didn’t need to take out a mortgage to buy his $25.8 million luxury condo at the Plaza on Fifth Avenue at Central Park."