By Aparajita Saha-Bubna
Of DOW JONES NEWSWIRES
At GMAC Inc., market forces already did much of the pay czar's task of cutting compensation.
When Kenneth Feinberg cut compensation at seven companies getting extraordinary government support, the biggest single reduction was at GMAC, the closely held auto lender being propped up by the U.S. government. Feinberg proposed a reduction of $413 million from 2008 compensation for 22 top-paid employees at GMAC--nearly half of all the compensation cuts he announced at the seven companies, according to documents released last week by the Treasury.
But what the numbers don't reveal is that the collapse in the value of GMAC's closely held stock last year already slashed compensation at the company. In terms of take-home pay, the top-paid 22 employees at GMAC earned about $69 million in 2008, according to a person close to GMAC--little different from the $70 million Feinberg is assigning to the employees in 2009.
Ultimately, whether the GMAC employees take home more or less than $70 million this year will again depend on how GMAC fares.
Compensation, when it involves lots of stock, can fluctuate wildly in value. Measures of compensation are essentially snapshots at a moment in time. And in the case of GMAC, the fluctuation was so severe that it arguably distorted the picture of how much savings Feinberg has negotiated from the companies under his purview.
To be sure, Feinberg, and the Treasury Department, aren't making up numbers. Feinberg is using the compensation numbers reported by GMAC, the numbers it planned on for 2008. In getting to the $413 million decrease, three long-term stock plans were also counted, two of which were scrapped during 2008 by GMAC because their value was rendered nearly worthless. GMAC says the Treasury counted the value of the disbanded stock programs, which would have been paid out over a number of years, because they were part of the company's initial compensation plan for 2008.
Steve Kaplan, a professor of finance at the University of Chicago Booth School of Business, says, "It's tricky; realized value can be very different from expected value" in the case of long-term stock compensation.
"You don't eat" the value of these stock grants the date they were granted, says Kaplan. "You eat what's realized. You want to look at both."
A Treasury spokeswoman declined to comment on whether GMAC's falling stock value last year diminished the scale of pay cuts at GMAC.
Hefty pay for executives at struggling companies being bailed out by the government has triggered political and popular indignation. Feinberg's role, in part, was to address such concerns at seven companies. His rulings last week covered the highest-paid 25 employees in 2008 at companies including GMAC, Citigroup Inc. (C), Bank of America Corp. (BAC), American International Group Inc. (AIG), General Motors Corp. (G), Chrysler Group LLC and Chrysler Financial. For GMAC, three of its top 25 executives have since left the company.
The value of GMAC's stock compensation shrank in 2008 as its business nearly foundered on prohibitive borrowing costs and losses at its auto lending and mortgage units. Residential Capital LLC, GMAC's struggling mortgage lender, alone lost $9.96 billion in 2008 and 2007. GMAC's share value also was diluted by the federal bailout, which changed the company's ownership structure.
To survive, GMAC registered as a bank, giving it access to Troubled Asset Relief Program bailout funds and allowing it to borrow at cheaper rates. All told, GMAC has gotten $12.5 billion in TARP funds; it is in talks with the Treasury to get a third infusion of $2.8 billion to $5.6 billion in bailout capital.
The extraordinary federal help GMAC has received underscores the auto lender's role in federal efforts to resuscitate the ailing auto makers General Motors and Chrysler. GMAC provides loans to auto dealers that use the funds to stockpile their inventory of new vehicles. It also lends to consumers buying cars.
Feinberg did reduce some compensation requests by GMAC for 2009. For instance, he extended, by several years, the dates when executives may redeem their stock salary, according to a letter dated Oct. 22 to GMAC's Chief Executive Al de Molina. The Feinberg letter lays out "total direct compensation"--including cash, stock and long-term restricted stock--for the top 22 GMAC earners in 2009. For this year, de Molina's target compensation is $8.45 million, according to the person close to GMAC.
De Molina's pay got chopped by the company's troubles in 2008. GMAC's annual report for 2008 shows he was given a stock grant in September last year valued by the company's board at $7.3 million, staggered over five years, or $1.46 million a year, assuming the stock held its value. Instead, de Molina got $179,810 in cash at the end of last year, in line with the diminished value of the stock, according to GMAC's annual report.
"We felt the process for determining executive compensation was fair and constructive," says de Molina. "The pay restrictions have been structured responsibly and in a way that will keep us focused on enhancing value for shareholders and repaying the government's investment, which we fully intend to do."
GMAC says that executive compensation could fluctuate sharply again this year. The amount of pay targeted in 2009 is split between 15% cash and 85% stock for the highest-paid 22 employees; GMAC had originally proposed to the Treasury a higher cash component of 20%, according to people familiar with the negotiations. Compensation for 2008 was more heavily weighted toward cash.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com
(Dan Fitzpatrick at The Wall Street Journal contributed to this article.)