Amid the aftermath of the global financial meltdown, Clayton Winkelvoss ’10 found a perfect topic for his Honors thesis: executive compensation on Wall Street. Did banks receiving funds from the Troubled Assets Relief Program offer their employees larger or smaller compensation packages in 2008 than they did in 2007, before the financial crisis? Winkelvoss' work is the first in a series of E-net profiles that showcase Elon undergraduate research during CELEBRATE! 2010.
A senior accounting major and Honors Fellow, Winkelvoss worked under the guidance of Tony Amoruso, an assistant professor of accounting. The project identified compensation packages given to executives at several large banks that accepted TARP funds from the federal government in fall 2008.
Winkelvoss compared that data to the banks’ earnings per share and stock prices in 2007 and 2008 and assessed the health of the banks by those numbers. The results, he said, were intriguing.
Winkelvoss, a Pittsburgh native, sat down recently with the Office of University Relations to discuss his work.
Q: Why are executives compensated in the first place?
A: The fundamental theory for all of this is what we call agency theory, which states that there is a separation of ownership and control. The owners of companies are the stockholders and their agents are the managers or CEOs. The owners hire the agents to take care of their corporate interests. But the agents want to control their own personal interests to some degree. Compensation tries to fill the “agency problem” – the separation of interests between the owners and the agents. If agency theory holds true, whenever banks, or companies in general, perform poorly, compensation should fall. If they perform well, it should not.
Q: What did you find?
A: I separated the banks (31 of the largest TARP recipients, each of which received more than $400 million in aid) into “stable banks” and “troubled banks.” The troubled banks had low earnings per share that dropped from 2007 to 2008, or had stock prices that had considerably declined. The stable banks weren’t necessarily “good” banks but showed consistency in earnings and stock prices, or they at least hadn’t dropped very much.
Ultimately, agency theory held up through all of this. At banks that were more stable, executives earned more compensation overall, and at banks that were more troubled, they earned less. There were a few of the troubled banks that kept compensation pretty consistent or even increased it, but the really large troubled banks – CitiGroup, Bank of America and others – really declined. Vikram Pandit, CEO of Citigroup, accepted a salary of one dollar in 2009. That was his only compensation. Ken Lewis of Bank of America, his compensation was cut entirely. The stable banks sometimes cut compensation, but not by nearly as much. Some of the banks actually increased compensation – such as Wells Fargo and PNC.
Q: Why do you think your research topic and findings are important?
A: It’s such a hot topic in the news. Everyone has an opinion about it. They say, “Well, they’re receiving these compensation packages that they just don’t deserve.” When you look at the data, you see that, while some of these executives may not “deserve” that specific amount, what they received was in line with how the company was faring. If the company fared better, they got better compensation packages. If it was performing poorly, they got less.
Everyone wants to bring in the ethical argument, saying, “They’re paid too much in general.” That’s the kind of argument that’s way outside the realm of finance or accounting. It’s a social responsibility argument. But if you step back a little bit, present all the facts and collect a little bit of data, you’ll find that, while maybe it wasn’t justified from an ethical perspective based on your interpretation, it does make some sense in terms of the relationship to how their company was doing.