Commentary by David F. Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.
The economic stimulus bill passed by Congress in 2009 included a last-minute provision that restricts the compensation paid to executives at companies that have received federal funding. Executive bonuses were limited to no more than one-third of total compensation. Further, bonuses could only be paid in restricted stock, not stock options. The restrictions were intended to alter the composition of pay packages that were deemed to encourage excessive risk taking.
Two companies that fall under these restrictions handled the restrictions differently.
Wintrust Financial, based in Illinois, increased cash salaries for executive officers. For example, the base salary of President and CEO Edward J. Wehmer increased from $800,000 to $1,100,000, with $100,000 of the increase paid in company stock. Wintrust explained, “The salary adjustments are not intended to increase total annual compensation for the executive officers, but instead only to adjust the mix between fixed and variable compensation paid to them.” Wintrust Financial, Form 8-K, Filed August 20, 2009
Wells Fargo increased base salaries for executive officers, with much of the increase paid in company stock. Long-term stock incentives were commensurately decreased. The base salary of President and CEO John Stumpf increased from $900,000 to $5,600,000 with the increase paid in the form of stock granted under the company’s long-term incentive program. Wells Fargo, Form 8-K, Filed August 6, 2009
Investors will have to decide whether either of these changes have a substantive impact on executive incentives or, by extension, corporate risk management.