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Treasury Significantly Loosened Executive Pay Limits Resulting in Excessive Pay for Top 25 Employees at GM and Ally (GMAC) When the Companies Were Not Repaying TARP in Full and Taxpayers Were Suffering Billions of Dollars in Losses Report Number 14-001 September 24, 2014 Treasury Significantly Loosened Executive Pay Limits Resulting in Excessive Pay for Top 25 Employees at GM and Ally (GMAC) When the Companies Were Not Repaying TARP in Full and Taxpayers Were Suffering Billions of Dollars in Losses Summary When Congress passed the Troubled Asset Relief Program (“TARP”) and subsequent economic stimulus legislation, it placed limitations on executive compensation for TARP recipients, and left it to the U.S. Department of the Treasury (“Treasury”) to implement the limitations. Treasury created the Office of the Special Master for TARP Executive Compensation (“OSM”). Kenneth R. Feinberg served as the Special Master – often called the pay czar – and was succeeded by Patricia Geoghegan, currently serving as the Acting Special Master. OSM has jurisdiction over compensation at companies that stood out from the more than 700 TARP recipients because of the amount and nature of their exceptional bailout. OSM sets pay for the Top 25 employees at these TARP exceptional assistance recipients. The Top 25 includes the 5 senior executive officers and the next 20 most highly compensated employees. In January 2012 and January 2013, the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) reported on the results of its evaluations of compensation set by Treasury for Top 25 employees at companies that received TARP help deemed exceptional. SIGTARP’s reports highlighted that Treasury had failed to rein in excessive pay and failed to implement meaningfully SIGTARP’s recommendations to develop robust criteria, policies, and procedures to ensure it could meet its own pay-setting guidelines. In April 2013, shortly before the Acting Special Master approved compensation for Top 25 employees of the two remaining companies that received exceptional TARP assistance – Ally Financial Inc. (“Ally”) and General Motors Corporation (“GM”) – Representative Jim Jordan, Chairman of the U.S. House Committee on Oversight and Government Reform Subcommittee on Economic Growth, Job Creation, and Report Number 14-001 Regulatory Affairs, requested that SIGTARP determine the number and value of pay raises requested by Ally and GM and approved by Treasury, and the companyproposed and Treasury-approved compensation that exceeded Treasury’s paysetting guidelines. Shortly after receiving Congress’ request, SIGTARP initiated this evaluation with the specific objective to assess the 2013 pay packages proposed by the companies and the decisions made by Treasury for compensation for the Top 25 employees at Ally and GM. What SIGTARP Found Overall, SIGTARP found Treasury significantly loosened executive pay limits, resulting in excessive pay for Top 25 employees at GM and Ally while the companies were not repaying TARP in full and taxpayers were suffering billions of dollars in losses. Treasury also made limited progress implementing recommendations previously made by SIGTARP. These were designed to promote good Government practices, improve transparency, consistency, and accountability and ultimately protect taxpayers from subsidizing excessive compensation at TARP companies. In 2013, OSM continued awarding excessive pay raises and only put back a minimal amount of long-term restricted stock as part of pay packages and eliminated it altogether again in 2014 from pay packages. In June 2013, OSM created for the first time a written policy and procedures. However, OSM’s policy merely recites TARP legislation and the TARP Standards for Compensation and Corporate Governance; Interim Final Rule (“IFR,” or “Treasury’s Rule”), both in existence prior to the establishment of OSM, leaving OSM as an office of Treasury that operates without formal written policies developed by that office. SIGTARP found that Treasury still lacks robust policies, procedures, or criteria to ensure that OSM’s guidelines are met. September 24, 2014 Treasury Significantly Loosened Executive Pay Limits Resulting in Excessive Pay for Top 25 Employees at GM and Ally (GMAC) When the Companies Were Not Repaying TARP in Full and Taxpayers Were Suffering Billions of Dollars in Losses Both GM and Ally stood out from the other five companies previously under OSM’s jurisdiction. At the time OSM set pay for the Top 25 employees at GM and Ally in April 2013, SIGTARP found that pay set by Treasury for Ally’s and GM’s top employees did not reflect that those companies were not repaying TARP in full after four years, resulting in billions of dollars in taxpayer losses. Moreover, at the time of Treasury’s pay determinations, it was public knowledge that the companies were not repaying TARP in full and Treasury had already suffered an $8.2 billion loss in GM, and Ally had made no repayments of the principal TARP investment. While Ally was under a March 2013 failed stress test, taxpayers suffered a loss of $845 million when Treasury sold Ally common stock in the market. While SIGTARP was conducting this evaluation, Treasury sold its remaining TARP shares of GM in the market to arrive at a total loss to taxpayers of $11.159 billion, and sold some additional Ally common stock in the market to arrive at total losses of $1.8 billion. In 2013, OSM approved cash salaries over $500,000 for more than one-third (16 of 47) of the top employees of GM and Ally. Year after year, Treasury has loosened executive pay limits, getting further and further away from the President’s announced pay reforms and pay limits used by Treasury in 2009, even as taxpayer losses mount. The President announced that top executives at firms receiving extraordinary help from U.S. taxpayers would have their compensation capped at $500,000, with any additional compensation in the form of stock that can’t be paid up until taxpayers are paid back for their assistance. Treasury, however, did not limit additional compensation beyond $500,000 to “stock that cannot be paid up until taxpayers are paid back,” as the President announced. For example, in 2013, OSM approved effectively only 5% of Ally employees’ compensation in the form of long-term restricted stock and then eliminated it entirely from Ally employees’ pay packages in 2014. Report Number 14-001 Treasury’s mounting exceptions to its own guideline restrictions on executive compensation resulted by 2013 in OSM moving further and further away from the President’s announcement and OSM’s prior guidelines. Instead of making meaningful reforms to its process, OSM rolled back its application of guidelines aimed at curbing excessive pay, whereby approving high pay driven by Ally and GM’s excessive pay proposals without independent analysis and under an ill-defined, pay-setting process that lacked objective criteria. SIGTARP found several examples delineating OSM’s rolling back of guidelines. For example, Treasury approved at least $1 million in pay for every Top 25 employee in 2013 and increased compensation by 28% for GM and Ally Top 25 employees from 2009 to 2013. Treasury tripled the number of GM and Ally employees who received cash salaries exceeding $500,000 from 2009 to 2013 and allowed 89% of the employees to be paid cash salaries of $450,000 or more in 2013. Treasury approved $3 million in pay raises, ranging from 4% to 20%, for nine GM employees in 2013, most of whom received raises in consecutive years. Treasury also continued to loosen time restrictions by a full year for employees to cash out company stock received as pay. Additionally, in 2009, Treasury’s guideline was to set pay to “generally not exceed the 50th percentile of total compensation for similarly situated employees.” The pay Treasury awarded most of the employees in 2013 exceeded the market median based on comparable positions and companies as determined by Treasury. Treasury set pay for 88% (30 of 34 employees) of these proposed employees, which exceeds market medians. On an individual basis, these pay packages exceeded market medians by amounts ranging from $17,700 to $2.7 million, for a total of $22.9 million. Of the 30, Ally received 18 and GM received 12. Treasury appears now to have done away with this guideline because by 2014, September 24, 2014 Treasury Significantly Loosened Executive Pay Limits Resulting in Excessive Pay for Top 25 Employees at GM and Ally (GMAC) When the Companies Were Not Repaying TARP in Full and Taxpayers Were Suffering Billions of Dollars in Losses Treasury set most of Ally’s pay between the 50th and 75th percentiles. The pendulum in OSM’s pay decisions has swung too far in the direction of keeping companies competitive, without regard for the fact that the reason to keep companies competitive is so that they can repay taxpayers in full, but GM and Ally were not repaying taxpayers in full. Rather, taxpayers have suffered billions of dollars in losses on those TARP investments. Two aspects of Treasury’s pay-setting process and pay decisions serve as important lessons learned. First, loosening limits on executive compensation for companies unable to repay TARP subjects Treasury to criticism that is rewarding top executives at companies that are losing taxpayers’ money over the interests of the taxpayers already shouldering billions of dollars in losses on those investments. Second, by setting pay further and further away from the President’s and Treasury’s announced limitations on executive compensation for TARP company officials, Treasury is missing an opportunity for critical reforms to a material cause of the financial crisis and a strong deterrent to future bailouts. Report Number 14-001 What SIGTARP Recommends In this report, SIGTARP made 11 recommendations aimed at enhancing OSM’s pay-setting process and pay decisions. These recommendations include maintaining improved documentation of OSM and Treasury’s communications regarding compensation, performing and documenting independent analyses before OSM approves company requests for cash salaries exceeding $500,000, cash salaries exceeding market medians, and annual pay increases. SIGTARP also recommended OSM use long-term restricted stock as part of each employee’s compensation package to ensure compensation is tied to both the employee’s and the company’s performance, and the full repayment of TARP funds. Finally, SIGTARP recommended OSM enhance its written procedures regarding targeting median total compensation. Treasury provided an official written response to a draft of this report in a letter dated September 21, 2014, which is produced in full in Appendix I. Treasury did not clearly agree to implement any of the report’s recommendations, which were intended to improve transparency and program performance. September 24, 2014 Treasury Significantly Loosened Executive Pay Limits Resulting in Excessive Pay for Top 25 Employees at GM and Ally (GMAC) When the Companies Were Not Repaying TARP in Full and Taxpayers Were Suffering Billions of Dollars in Losses Table of Contents Background .................................................................................................................................................... 1 SIGTARP’s January 2012 Report Found that Treasury Approved Excessive Compensation for TARP Recipients .................................................................................................................................... 3 SIGTARP’s January 2013 Report Found that Treasury Continues Approving Excessive Compensation for TARP Recipients ....................................................................................................... 5 Treasury Made Limited Progress Since SIGTARP’s Last Report, but Did Not Make the Meaningful Reforms Needed ...................................................................................................................... 8 Treasury-Approved Pay for Top Employees at GM and Ally Does Not Reflect that Those Companies Were Not Repaying TARP in Full After Four Years, Resulting in Billions of Dollars in Taxpayer Losses ................................................................................................................... 11 Treasury Has Loosened Executive Pay Limits Year After Year, Getting Further and Further Away from the President’s Announced Pay Reforms and Pay Limits Used by Treasury in 2009, Even as Taxpayer Losses Mount ............................................................................................................................ 16 In 2013, Treasury Approved at Least $1 Million in Pay for Every Top 25 Employee at GM and Ally, and Approved Total Compensation that Was More Than 28% Higher Than 2009 Pay ................. 22 Treasury Tripled the Number of GM and Ally Employees Paid More than $500,000 in Guaranteed Cash Salaries from 2009 to 2013 and Allowed 89% of the Employees To Be Paid Cash Salaries of $450,000 or More ................................................................................................................................. 24 In 2013, Treasury Approved $3 Million in Pay Raises for Nine GM Employees, Most of Whom Received Pay Raises in Consecutive Annual Years ............................................................................. 26 Conclusion .................................................................................................................................................... 35 Recommendations ........................................................................................................................................ 42 Appendix A – Objective, Scope, and Methodology..................................................................................... 45 Appendix B – Treasury 2013 Pay Determinations for Ally ......................................................................... 47 Appendix C – Treasury 2013 Pay Determinations for GM ......................................................................... 48 Appendix D – Treasury 2014 Pay Determinations for Ally......................................................................... 49 Report Number 14-001 September 24, 2014 Treasury Significantly Loosened Executive Pay Limits Resulting in Excessive Pay for Top 25 Employees at GM and Ally (GMAC) When the Companies Were Not Repaying TARP in Full and Taxpayers Were Suffering Billions of Dollars in Losses Appendix E – OSM-Approved Total Pay over Market Medians in 2013 .................................................... 50 Appendix F – Status on Each of SIGTARP’s Seven Recommendations ..................................................... 51 Appendix G – Acronyms and Abbreviations ............................................................................................... 53 Appendix H – Evaluation Team Members ................................................................................................... 54 Appendix I – Management Comments......................................................................................................... 55 Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 1 Background When Congress authorized the Troubled Asset Relief Program (“TARP”), it required that TARP recipients abide by certain rules on executive compensation, rules that it left to the U.S. Department of the Treasury (“Treasury”) to promulgate. Limits on executive compensation at TARP recipients are important for several reasons. First, limits on executive compensation for TARP companies are a tradeoff for the bailout because taxpayers are subsidizing TARP companies. As stated by former Treasury Special Master for TARP Executive Compensation (“Special Master”) Kenneth R. Feinberg in his book, Who Gets What: Fair Compensation after Tragedy and Financial Upheaval (“Who Gets What”): Congress could not stand idly by and accept a one-way bargain with Wall Street. There would have to be a price to pay for such Congressional largesse….If Main Street was required to come to Wall Street’s rescue, there would be a price to pay: leaders in Congress and the new Obama administration didn’t want to see headlines discussing how financial “fat cats” were collecting outrageous salaries from companies supported by taxes of ordinary citizens. Second, limits on executive compensation at TARP companies serve as important reforms to a material cause of the financial crisis and a possible deterrent to future bailout requests. Former Treasury Secretary Timothy F. Geithner said that executive compensation played a material role in causing the financial crisis because it encouraged excessive risk taking. Congress specifically required in the TARP authorizing legislation that institutions in TARP abide by certain rules on executive compensation intended to avoid excessive risks. On February 4, 2009, the President held a press conference with former Treasury Secretary Timothy F. Geithner announcing reforms, including new limits on pay, stating: We are going to be demanding some restraint in exchange for federal aid so that when firms seek new federal dollars, we won’t find them up to the same old tricks. As part of the reforms we’re announcing today, top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000, a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can’t be paid up until taxpayers are paid back for their assistance. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 2 Seven companies had received TARP help deemed “exceptional” – because the amount and nature of their bailouts stood out from the more than 700 other TARP recipients. Those were American International Group, Inc. (“AIG”), Bank of America Corporation (“Bank of America”), Citigroup Inc. (“Citigroup”), Chrysler Financial Services Americas LLC (“Chrysler Financial”), Chrysler Holding LLC (“Chrysler”), General Motors Corporation (“GM”), and Ally Financial Inc. (“Ally”), formerly General Motors Acceptance Corp. (“GMAC Inc.”). Thirteen days after the President’s announcement, Congress enacted the American Recovery and Reinvestment Act of 2009 (“the Recovery Act”), which among other things, limited bonuses for the Top 251 employees at TARP institutions (depending on the amount of TARP investment) unless paid in restricted stock that did not exceed one-third of total compensation. Responsible for promulgating rules limiting executive compensation for TARP companies, Treasury, through a rule known as the TARP Standards for Compensation and Corporate Governance; Interim Final Rule (“IFR,” or “Treasury’s Rule”), created the Office of the Special Master for TARP Executive Compensation (“OSM”), but gave it limited scope. OSM sets the annual pay for the Top 25 most highly paid employees at the seven TARP exceptional assistance companies, until the company is no longer in TARP.2 Treasury’s Rule articulated the following six principles for OSM: Risk – the compensation structure should avoid incentives to take unnecessary or excessive risks that could threaten the value of the TARP recipient; Taxpayer Return – the compensation amount and structure should reflect the need for the TARP recipient to remain a competitive enterprise, to retain and recruit talented employees who will contribute to the TARP recipient’s success, and ultimately, its ability to repay TARP obligations; Appropriate Allocation – the compensation structure should appropriately allocate compensation between components such as salary and short-term and long-term incentives; Performance-based Compensation – an appropriate portion of the compensation should be based on performance metrics over a relevant period; Comparable Structures and Payments – the compensation amount and structure should be consistent with those for persons in similar positions or roles “at similar entities that are similarly situated”; and Employee Contribution to TARP Recipient Value – the compensation structure and amount should reflect the current or prospective contributions of an employee to the value of the TARP recipient. 1 The Top 25 includes the 5 senior executive officers and the next 20 most highly compensated employees. Members of the Top 25 may vary from year to year. 2 The Special Master also approves compensation structures, rather than individual pay, for the next 75 most highly compensated employees. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 3 SIGTARP’s January 2012 Report Found that Treasury Approved Excessive Compensation for TARP Recipients On January 23, 2012, the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) issued a report over how Treasury’s OSM set pay for the Top 25 employees at the seven TARP companies under OSM’s jurisdiction. SIGTARP reported that Former Special Master Kenneth R. Feinberg, who served as Treasury’s Special Master from June 15, 2009, to September 10, 2010, stated that the six principles contained in Treasury’s Rule are inherently inconsistent, and therefore he determined pay for Top 25 employees in a three-step methodology using what he called “prescriptions,” or guidelines. OSM Determined Pay for the Top 25 Employees in a Three-Step Methodology First, OSM sets total compensation on the OSM prescription that it should generally not exceed the 50th percentile of total compensation for similarly situated employees. The first step in the formula was to determine each employee’s total compensation by basing it on the 50th percentile compensation level for the employee’s position, scope, and responsibilities relative to what their peers in comparable positions are earning. To determine the 50th percentile, OSM uses the U.S. Mercer Benchmark Database and Equilar’s ExecutiveInsight Total Compensation Report to determine whether the market data submitted by the TARP companies were reasonable. Second, OSM sets cash salaries using an OSM prescription that salaries generally should not exceed $500,000 per year, except for good cause shown. As reported in SIGTARP’s January 2012 report, OSM staff told SIGTARP that the $500,000 cash salary limit was based partially on President Obama’s statement that salaries should be limited to $500,000. Former Special Master Feinberg told SIGTARP that he made the decision to limit cash salaries to $500,000 and to increase the proportion of compensation in the form of stock to strike a balance between reducing excessive risk and providing enough compensation to keep employees’ “skin in the game.” Third, OSM determines how much of the remaining compensation would be paid in stock salary with a value dependent on the company’s future success and long-term restricted stock. OSM determined the amount of stock salary and long-term restricted stock by deducting the cash salary from total compensation. The Recovery Act limited long-term restricted stock to one-third of the employee’s total pay. Under the process set up by former Special Master Feinberg, OSM calculated the amount of long-term restricted stock, and the remainder of the compensation package was salary in the form of company stock (called “stock salary”), which vests immediately upon grant. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 4 As reported in SIGTARP’s January 2012 report, to tie individual compensation to long-term company success, OSM used long-term restricted stock contingent on the employee achieving specific performance criteria. Long-term restricted stock does not fully vest until the repayment of TARP financial assistance. As reported in SIGTARP’s January 2012 report, OSM officials then told SIGTARP that companies were very hesitant to pay long-term restricted stock because there was no certainty that some of the companies would ever be free of TARP. SIGTARP concluded in its January 2012 report that the Special Master could not effectively rein in excessive compensation because he was under the constraint that his most important goal was to get the companies to repay TARP. Given OSM’s overriding goal, the seven companies had significant leverage over OSM by proposing and negotiating for excessive pay packages, warning Special Master Feinberg that if he did not provide competitive pay packages, top officials would leave and go elsewhere, a claim that he said, at that time, did not come true as 85% of the people were still at the companies.3 SIGTARP reported that, although generally OSM limited cash compensation and made some reductions in pay, OSM still approved total compensation in the millions. SIGTARP found that, although the Special Master created a prescription that cash salaries should not exceed $500,000 except for good cause, OSM was inconsistent in approving cash salaries in excess of $500,000. SIGTARP also reported that getting out from under the Special Master’s purview was a factor for repayment of TARP exceptional assistance by Bank of America and Citigroup. Both companies were subject to OSM’s determinations only from October 2009 to December 2009. Citigroup officials told SIGTARP that, from the beginning, Citigroup’s perspective was that it would be subject only to the Special Master’s determinations for 2009. SIGTARP’s September 29, 2011, audit report, “Exiting TARP: Repayments by the Largest Financial Institutions,” reported that Citigroup’s CEO told SIGTARP that the desire to escape management compensation restrictions was a factor motivating Citigroup’s desire to exit TARP. Two of Bank of America’s former executives also told SIGTARP that executive compensation was an important factor in the firm’s decision to repay TARP. One of the executives told SIGTARP that executive compensation was a major factor behind the firm’s repayment decision and that the company did everything possible to get out from under the executive compensation rules. Once these two banks exited the exceptional assistance TARP programs and OSM’s jurisdiction, salaries and bonuses climbed. 3 Former Special Master Feinberg wrote in his book that it was not clear that the departure of the 15% who left was tied to compensation. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 5 SIGTARP made three formal recommendations in the January 2012 report: To ensure that OSM consistently grants exceptions to the $500,000 cash salary cap, OSM should substantiate each exception requested and whether the requests demonstrate or fail to demonstrate “good cause.” OSM should better document its use of market data in its calculations. OSM should develop more robust policies, procedures, or guidelines to help ensure that its pay determination process and its decisions are evenhanded. These measures will improve transparency and help OSM consistently apply Treasury’s principles of “appropriate allocation,” “performance-based compensation,” and “comparable structures and payments.” SIGTARP’s January 2013 Report Found that Treasury Continues Approving Excessive Compensation for TARP Recipients After issuing the January 2012 report and three formal recommendations, SIGTARP conducted a follow-up review, issuing a report in January 2013, finding that Treasury had again failed to rein in excessive pay. In January 2013, SIGTARP reported that, even though OSM set guidelines aimed at curbing excessive pay, SIGTARP previously warned that Treasury lacked robust criteria, policies, and procedures to ensure those guidelines are met. Despite SIGTARP’s prior report, Treasury made no meaningful reform to its process. Absent robust criteria, policies, and procedures to ensure its guidelines were met, OSM’s decisions were largely driven by the pay proposals of the same companies that historically, and again in 2012, proposed excessive pay. With the companies exercising significant leverage, Acting Special Master Patricia Geoghegan rolled back OSM’s application of guidelines aimed at curbing excessive pay. SIGTARP reported that OSM awarded $6.2 million in pay raises to 18 of the 18 employees for whom the companies proposed raises. SIGTARP reported that OSM awarded cash salaries of $500,000 or more to 70% of the executives under OSM’s pay-setting jurisdiction and allowed 94% of the top employees to be paid cash salaries of $450,000 or more. SIGTARP reported that OSM removed long-term, incentive-based stock as requested by the companies. SIGTARP found that, although OSM bettered its documentation of the employees awarded more than a $500,000 cash salary, OSM did not “substantiate” that high cash salary, but instead listed a justification that largely parroted what each company asserted to OSM without an OSM independent analysis. SIGTARP reported in January 2013 that OSM is effectively relinquishing some of OSM’s authority to the companies that have their own best interests in mind. OSM’s job is to look out for the interests of taxpayers, which it cannot do if it continues to rely to a great extent on the company’s proposals and justifications. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 6 In January 2013, SIGTARP reported that guidelines aimed at curbing excessive pay are not effective, absent robust policies, procedures, or criteria to ensure that the guidelines are met; however, OSM still did not have robust policies, procedures, or criteria to ensure that pay for executives at TARP exceptional assistance companies stays within OSM guidelines. SIGTARP reported that perhaps the Acting Special Master thinks that OSM has already succeeded in achieving its mission by limiting compensation for these executives from preTARP levels, but the question is whether OSM’s existing policies are sufficient for taxpayers. SIGTARP found in January 2013 that Treasury continues to award excessive pay packages, including large guaranteed cash salaries, but meaningful reform was still possible because GM and Ally remained under OSM’s jurisdiction. SIGTARP ended the report with a warning that without meaningful reform, including independent analysis by OSM, Treasury risks that TARP companies could potentially misuse taxpayer dollars for excessive executive compensation. SIGTARP made four recommendations in the January 2013 report: Each year, Treasury should reevaluate total compensation of executives at TARP exceptional assistance companies remaining in the Top 25 from the prior year, including determining whether to reduce total compensation. To ensure that Treasury effectively applies guidelines aimed at curbing excessive pay and reducing risk taking, Treasury should develop policies, procedures, and criteria for approving pay in excess of Treasury guidelines. Treasury should independently analyze whether good cause exists to award a Top 25 employee a pay raise or a cash salary over $500,000. To ensure that OSM has sufficient time to conduct this analysis, Treasury should allow OSM to work on setting Top 25 pay prior to OSM’s receiving the company pay proposals, which starts the 60-day timeline. To be consistent with Treasury’s Rule that the portion of performance-based compensation compared to total compensation should be greater for positions that exercise higher levels of responsibility, Treasury should return to using long-term restricted stock for employees, particularly senior employees such as CEOs. Representative Jim Jordan, Chairman of the U.S. House Committee on Oversight and Government Reform Subcommittee on Economic Growth, Job Creation, and Regulatory Affairs, requested that SIGTARP evaluate the 2013 companyproposed and Treasury-approved pay packages for the two remaining companies in TARP that had received exceptional financial assistance – Ally and GM. Chairman Jordan specifically asked SIGTARP to determine the number and value of pay raises requested by Ally and GM and approved by Treasury, and the company-proposed and Treasury-approved compensation that exceeded Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 7 Treasury’s pay-setting guidelines. In April 2013, shortly before the Acting Special Master approved compensation for Ally and GM employees, SIGTARP initiated this evaluation with the specific objective to assess the 2013 pay packages proposed by the companies and the decisions made by Treasury for compensation for the Top 25 employees at Ally and GM. SIGTARP conducted this evaluation between April 2013 and September 2014 in accordance with the “Quality Standards for Inspection and Evaluation” established by the Council of the Inspectors General on Integrity and Efficiency. For a discussion of the evaluation’s scope and methodology, see Appendix A. While SIGTARP was conducting this review, in December 2013, GM exited TARP, but not by repaying TARP. Instead, Treasury decided to sell its remaining shares of GM common stock at a loss. Taxpayers suffered an $11.159 billion loss on its TARP investment in GM. In November 2013, Ally repurchased from Treasury certain securities called mandatorily convertible preferred shares. In January 2014, Treasury sold shares of Ally common stock in the market at a loss of $845 million. On April 2, 2014, Treasury’s OSM issued 2014 pay decisions for the Top 25 employees at Ally, the last company under OSM’s jurisdiction. Days later, on April 15, 2014, Treasury sold additional Ally stock in the market at a loss of $918 million. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 8 Treasury Made Limited Progress Since SIGTARP’s Last Report, but Did Not Make the Meaningful Reforms Needed Treasury made some progress after SIGTARP’s last report, which SIGTARP credits, although much more is needed to implement six of SIGTARP’s seven recommendations, which are designed to protect taxpayers from subsidizing excessive compensation at TARP companies and through reforms of executive compensation practices that contributed to the financial crisis. Awarding Pay Raises: After SIGTARP raised concerns that OSM awarded pay raises to 18 of the 18 employees for whom the companies had requested raises for 2013 pay, OSM did not award pay raises to every employee for whom the companies requested. OSM denied pay raises to three GM employees new to GM’s Top 25 for whom the company had requested a raise, and denied pay raises to three Ally employees where the company had requested a raise. However, in 2013, OSM still awarded pay raises to each of the nine GM employees for whom GM had requested a raise and where the employee was in the Top 25 the prior year, and one GM employee in 2013 (after OSM issued GM’s determination letter). Removing Long-Term Restricted Stock: After SIGTARP raised concerns that in 2012 OSM had removed long-term restricted stock as part of pay for all Ally employees and for some GM employees and made a recommendation that Treasury return to using long-term restricted stock, in 2013 OSM put back long-term restricted stock, but only by a small amount (effectively 5%), then eliminated it from all pay packages in 2014. Lacking Robust Policies, Procedures, Guidelines, and Criteria: After SIGTARP raised concerns about OSM’s lack of written policies, procedures, guidelines, and criteria, for the first time in the history of OSM, in June 2013, Treasury created a written policy and procedures (including guidelines). However, SIGTARP found that this policy and those procedures were not robust or complete and failed to address all of the concerns raised by SIGTARP in prior reports or all of SIGTARP’s recommendations. They appeared instead to be an attempt at some documentation of what OSM had done historically without meaningful change as recommended by SIGTARP. o OSM’s policy consists of 2½ pages that merely recite TARP legislation and Treasury’s Rule (the IFR), both in existence prior to the existence of OSM, rather than recite any of the office’s policies. Accordingly, OSM is an office of Treasury that operates without meaningful formal written Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 9 policies that should have been developed by the office. By any measure of oversight, that should not be acceptable. o OSM’s policy and procedures better document how the companies provide OSM market data and information and that OSM reviews the companyprovided market data for accuracy (as SIGTARP recommended), but fails to address whether OSM continues to follow prior OSM guidance to set total compensation to generally not exceed the 50th percentile. OSM’s determination letters instead discuss targeting cash compensation (not total compensation) at the 50th percentile; however, OSM’s policy and procedures are silent on this issue. o OSM’s written policy and procedures (including guidelines) are silent on how OSM evaluates company requests for pay raises, a concern previously raised by SIGTARP with no meaningful reform. There appears to be no consistent criteria for who gets a pay raise and who does not. SIGTARP found that Treasury documentation was only slightly better than last year when OSM essentially parroted the company’s explanation for the pay raise. OSM’s documentation does not rise to the level of what SIGTARP recommended because it does not show that Treasury conducted independent analysis on whether good cause exists to award a pay raise beyond the company’s explanation and where the person’s pay falls in relation to the median. o OSM’s policy and procedures do not include independent analysis that OSM conducts or criteria that OSM considers to award cash salaries greater than $500,000. o OSM’s policy and procedures do not include criteria that OSM considers to remove long-term restricted stock, how much long-term restricted stock to award, or whether Treasury would award a greater portion of long-term restricted stock for positions that exercise higher levels of responsibility (as stated in Treasury’s Rule and SIGTARP’s recommendation). o After SIGTARP raised concerns that Treasury should reconsider pay each year, including whether to reduce pay rather than maintain or increase pay as OSM had done in the past, OSM included in its policy and procedures that OSM may reduce pay; however, OSM did not address guidelines or criteria it would consider in reducing pay. The Acting Special Master continues to state that OSM has implemented SIGTARP’s recommendations, and SIGTARP continues to tell Treasury and Congress in every SIGTARP Congressional report published quarterly that Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 10 SIGTARP considers only one of its recommendations to OSM to be implemented (better documentation of OSM’s use of market data), why that is the case, and what SIGTARP would expect to see for implementation of its recommendations. The Acting Special Master simply cannot unilaterally determine that the recommendation has been implemented in the face of SIGTARP disagreement. Treasury has not taken sufficient meaningful action to address serious concerns raised by SIGTARP of excessive Treasury-approved pay and to implement SIGTARP recommendations. OSM continues to lack robust policies, procedures, and criteria, which would hold OSM accountable to its guidelines that OSM created in the public interest. SIGTARP is extremely concerned that Treasury is allowing OSM to not fully implement SIGTARP’s recommendations. OSM has started to document its process and procedures.4 However, it is clear, based on statements by OSM officials to SIGTARP and OSM’s determination letters, that OSM continues to use criteria for decision making not captured in its formal policy and procedures. It is unclear whether this is objective or subjective criteria proposed by the companies. Why this matters: OSM is supposed to be acting in the public interest to limit excessive compensation at these two TARP companies. OSM meets with company officials and senior Treasury officials, all of which is undocumented, before making its decisions on pay. The importance of oversight over this process is critical to protect taxpayers. SIGTARP’s reports and recommendations represent another voice, the voice of taxpayers who fund TARP. SIGTARP’s recommendations are designed to promote good Government practices, improving transparency, consistency, and accountability, and ultimately ensure that taxpayers are not subsidizing excessive pay at TARP companies. SIGTARP believes a lack of robust criteria, policies, and procedures to ensure that OSM’s guidelines are met leads to a lack of transparency, inconsistency, and ultimately a lack of accountability to taxpayers because pay decisions are made more based on the company proposals and assertions rather than independent objective criteria designed to protect taxpayers. That is what OSM is doing, deciding which of the company’s proposals it will accept, with the companies each year requesting more and more pay with fewer and fewer restrictions. That may be how compensation committees work at private companies, but it is not good Government practice. Good Government requires objective criteria and procedures to ensure that guidelines designed to protect taxpayers are adhered to, rather than gutted by exception after exception. 4 Acting Special Master Geoghegan told SIGTARP that OSM told SIGTARP that it used the same pay-setting process for 2013 that it had used in prior years. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 11 Treasury-Approved Pay for Top Employees at GM and Ally Does Not Reflect that Those Companies Were Not Repaying TARP in Full After Four Years, Resulting in Billions of Dollars in Taxpayer Losses By 2013, Treasury’s OSM had an incredibly narrow job: (1) to set individual pay for the Top 25 most highly paid employees at the only two major companies left in TARP – GM and Ally; and (2) to set compensation structures, rather than individual pay, for the next 75 most highly paid employees at GM and Ally. Both GM and Ally stood out from the other five companies previously under OSM’s jurisdiction because they were still in TARP after four years, they were not repaying TARP in full, resulting in taxpayer losses on the TARP investment and Government estimates of billions of dollars in losses. At the time OSM set pay for top employees at GM and Ally in April 2013, Treasury had already written off $8.2 billion in losses on the TARP investment, and Ally had not repaid any principal. Instead, Treasury had sold some securities in a March 2011 public offering. However, OSM’s documentation of its process for setting pay, and the pay OSM set for GM and Ally for 2013, do not reflect the differences. At the time OSM set pay for top Ally employees in April 2014, Ally had repurchased some mandatorily convertible preferred stock from Treasury, and taxpayers had suffered more than an $845 million loss on selling Ally stock in the market. One of the six broad principles under which OSM operates is taxpayer return, and OSM has consistently touted as a measure of OSM’s success the positive returns to taxpayers from the other five TARP exceptional assistance recipients. For example, in February 2013, at a hearing of the House Committee on Oversight and Government Reform, Acting Special Master Patricia Geoghegan testified: In December 2012, AIG exited TARP, and the Federal Reserve and Treasury received back the entire $182 billion of assistance that AIG had received…with a total positive return of $22.7 billion. So, it is that kind of result that we are working for when we set our pay packages in our determination letter process. Despite Treasury’s articulating six principles, according to OSM, return to taxpayers of the TARP funds is OSM’s primary objective. On October 21, 2010, at a hearing of the Congressional Oversight Panel, former Special Master Feinberg testified that Treasury’s primary objective was to get taxpayers’ money back when setting compensation. He testified before the Congressional Oversight Panel on October 21, 2010: Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 12 Congress felt that the single most important thing I could do is get those seven companies to repay the taxpayer….Secretary Geithner made that clear. Congress made that clear. The Administration made that clear. And we succeeded, with three of those companies already repaying. Former Special Master Feinberg recounts in his book: [T]he secretary made clear that my primary goal as Treasury’s special master for TARP executive compensation was to determine payments for senior corporate officials that would maximize the likelihood that the designated companies would repay TARP loans as quickly as possible. The taxpayers had to be made whole. This was the top priority. Although OSM measures success on a company fully repaying TARP, it is silent when taxpayers have not been made whole, have suffered losses, and are estimated by the Government to take future billions of dollars in losses, as was the case with GM and Ally in 2013 and continues with Ally in 2014. OSM’s April 2013 letter to GM setting 2013 pay states: “Including proceeds from the sale of GM common stock held by Treasury, GM’s repayments totaled approximately $30.4 billion as of the end of March 2013.” However, Treasury selling stock into the market does not constitute repayment by GM nor does selling back to GM at a substantial loss constitute a repayment in full of the debt by GM. Moreover, Treasury sold that stock at a loss of billions of dollars. Unlike prior OSM press releases touting returns to taxpayers, OSM’s press release highlights that GM exited TARP without highlighting the cost at which GM exited TARP – an $11.2 billion loss to taxpayers. OSM’s April 2, 2014, press release discusses that Ally has repaid $15.3 billion, or 89%, of the $17.2 billion investment to Ally, without disclosing that these did not fully consist of repayments of the principal by the company and that taxpayers had suffered $845 million in losses from stock sales during this time period by Treasury on the Ally TARP investment. OSM cannot use repayment of the TARP investment to tout its success without taking responsibility for the lack of repayment by the company and TARP losses to taxpayers by companies under OSM’s jurisdiction. Treasury’s sale of company stock into the market is not the same as repayment by the company of its debt in full. It was public knowledge when OSM set 2013 pay and 2014 pay that the Government estimated a loss on the remaining GM stock and Ally stock held by Treasury in exchange for the TARP investment. When OSM set pay for 2013, the Congressional Budget Office and the Office of Management and Budget estimated that Treasury’s losses on the auto bailout were at $20 billion and $25 billion, respectively. Given that, as of March 31, 2014, taxpayers saw a Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 13 $2.9 billion loss in Chrysler and no loss from Chrysler Financial, losses from Treasury’s investments in GM and Ally would account for most of Treasury’s $14.9 billion loss for the auto industry bailout. In 2013, Treasury continued to sell its GM stock well below its break-even prices and ultimately made its final sale in December 2013, which left taxpayers losing a total of $11.2 billion in GM. In 2014, Treasury continued to sell Ally stock at a loss, including days after OSM set 2014 pay. Taxpayers have already suffered a loss of approximately $1.8 billion on the TARP investment in Ally. OSM’s policy and procedures do not provide any guidelines or criteria for taking into account a company’s lack of repayment of the initial TARP investment or whether Treasury was taking a loss on that investment. If return to taxpayers is the primary objective of Treasury’s OSM and a key metric of success, then policies, procedures, and guidelines should reflect how Treasury treats a lack of repayment by the company, as well as actual and estimated losses to taxpayers on the principal TARP investment. Moreover, despite being bound by a principle that compensation amount and structure should be consistent with those for persons in similar positions or roles “at similar entities that are similarly situated,” OSM’s policy, procedures, and guidelines do not reflect GM’s and Ally’s unique situation as the last two large TARP recipients that remained in TARP in 2013, or that Ally is the last large TARP recipient in 2014. When OSM set 2013 pay for GM’s Top 25 employees in April 2013, it was public knowledge that GM was not repaying TARP in full and that Treasury had already suffered a loss of more than $8.2 billion on its TARP investment in GM. In November 2010, Treasury made two sales of GM stock into the market, selling 412.3 million shares at a loss of $4.3 billion. Treasury sold the shares at an average price of $32.75 per share despite the fact that Treasury’s break-even price was $44.59 and $52.27 per share for the two sales, respectively. In December 2012, Treasury agreed to allow GM to buy back 200 million shares at a $3.2 billion loss to taxpayers. GM paid $27.50 per share despite the fact that Treasury’s break-even price at that time was $53.98 per share. Between January and April 2013, Treasury continued to sell GM stock into the market and continued losing money on the investment, losing more than $900 million. As shown in the following table, Treasury continued to take losses for taxpayers by selling its GM common shares at prices well below Treasury’s break-even prices from November 18, 2010, the date of GM’s initial public offering, until Treasury sold its last remaining shares of GM common stock on December 9, 2013. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 14 FIGURE 1 COMPARISON OF TREASURY’S BREAK-EVEN AND SALES PRICES FOR GM STOCK Source: SIGTARP analysis of Treasury’s February 19, 2014, Transaction Report. When OSM set 2013 pay for Ally’s Top 25 employees in April 2013, it was public knowledge that Ally was not repaying TARP in full, and soon after taxpayers suffered significant losses. Treasury continued to approve Ally’s requests for excessive pay in 2013 despite Ally’s failing the Federal Reserve Board’s (“FRB”) stress test and not repaying taxpayers. On March 7, 2013, while Treasury was determining Ally’s 2013 compensation, FRB announced Ally had insufficient capital to withstand a severe economic downturn and, therefore, Ally failed FRB’s stress test. Ally was the only company of 18 of the largest bank holding companies (those with $50 billion or more in total consolidated assets) to fail FRB’s capital adequacy test. In March 2011, Treasury generated approximately$2.7 billion in proceeds from selling Ally trust preferred securities in the market, not from a repayment by Ally. As of March 31, 2013, when OSM was setting pay for Ally, Ally had not made any repayments on the TARP principal investment. When OSM was setting pay Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 15 for Ally for 2014, taxpayers had already taken significant losses of more than $845 million from Treasury selling Ally stock into the market. Why this matters: Treasury’s pay decisions suggest that the principle of “repayment of TARP” inures to the benefit of top executives at TARP companies when Treasury sets pay. According to Feinberg’s book, taxpayer return was Secretary Geithner’s primary concern, described as: [C]ompensation should reflect the need for the company to recruit and retain key employees so the company ultimately could repay every cent borrowed. Pay back the taxpayers – with interest. Every company subject to my jurisdiction, and much of the Treasury bureaucracy, referenced this variable in urging the special master to be generous when it came to compensation. If Treasury wants to use “repayment of TARP” as a factor to approve “generous” pay, then the lack of repayment of every cent borrowed of TARP by GM and Ally should likewise be reflected by Treasury to limit or maintain pay, but not to loosen restrictions on pay. The goal, according to both Special Masters, was repayment in full to taxpayers, not losses. When Treasury was taking losses on its investment in GM, and Ally had not repaid taxpayers and was failing the stress tests, Treasury was rewarding the most highly paid GM and Ally employees with multimillion-dollar pay, pay raises, high guaranteed cash salaries, and little to no pay tied to long-term individual performance metrics. Taxpayers are already subsidizing losses on TARP investments in these companies and should not be forced by Treasury to subsidize excessive executive compensation. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 16 Treasury Has Loosened Executive Pay Limits Year After Year, Getting Further and Further Away from the President’s Announced Pay Reforms and Pay Limits Used by Treasury in 2009, Even as Taxpayer Losses Mount Year after year, OSM is awarding pay to top executives at TARP companies that gets further and further away from the President’s 2009 announced reforms: The President’s Announcement: As part of the reforms we’re announcing today, top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000, a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can’t be paid up until taxpayers are paid back for their assistance. Treasury approved cash salaries over $500,000 in 2013 for more than one-third (16 of 47) of the top employees of GM and Ally. In addition, the President announced that additional compensation would come in the form of stock that could not be paid up until taxpayers are paid back for their assistance. That form of stock is long-term restricted stock. However, in 2012, OSM removed long-term restricted stock from the pay packages of all Ally employees and some GM employees. After SIGTARP reported on OSM’s removal of that stock and Congress held a hearing on SIGTARP’s report, OSM gave extremely limited long-term restricted stock in 2013 (effectively 5% to Ally employees), only to eliminate it in 2014. Treasury is not limiting additional compensation beyond $500,000 to “stock that cannot be paid up until taxpayers are paid back,” as the President announced. Why this matters: OSM’s continued position that there is nothing requiring it to follow the President’s announcement misses the point because the President’s announcement was just as he stated – a reform – an important reform designed to combat one of the material causes of the financial crisis and provide a possible deterrent to future bailout requests. As stated by the President: “We are going to be demanding some restraint in exchange for federal aid so that when firms seek new federal dollars, we won’t find them up to the same old tricks.” First, it does raise the Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 17 question of who OSM believes is responsible for implementing the President’s announcement, if not OSM. The bigger issue is that OSM’s failure to follow reforms could have the unfortunate effect of ending up in the same place that required reforms in the first place. OSM’s Guidelines: The pay awarded by OSM also appears to no longer follow Treasury’s 2009 and 2010 guidelines created by former Special Master Feinberg. In SIGTARP’s 2012 report, given that OSM did not have robust policies and procedures, SIGTARP reported on OSM’s methodology called “prescriptions,” or guidelines, as described by OSM officials to SIGTARP as follows: First, OSM sets total compensation on the OSM prescription that it should generally not exceed the 50th percentile of total compensation for similarly situated employees. Second, OSM sets cash salaries using an OSM prescription that generally salaries should not exceed $500,000 per year, except for good cause shown. Third, OSM determines how much of the remaining compensation would be paid in stock salary with a value dependent on the company’s future success and long-term restricted stock. OSM no longer appears to follow these three guidelines. 50th Percentile: OSM’s prior guideline was to determine each employee’s total compensation by generally not exceeding the 50th percentile compensation level for the employee’s position, scope, and responsibilities relative to what their peers in comparable positions are earning.5 As SIGTARP reported in its 2012 report, OSM officials told SIGTARP that companies pushed back on the 50th percentile but, “if they were better than the 50th percentile, they wouldn’t be having discussions with OSM in the first place.” OSM appears to have abandoned its guideline that pay generally not exceed the 50th percentile of total compensation for similarly situated employees. The 50th percentile does not appear anywhere in OSM’s June 2013 policy and procedures. 5 The companies supply the market data to OSM, which determines the 50th percentile. OSM checks this data for accuracy. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 18 OSM no longer appears to be following Treasury’s guideline that total compensation generally not exceed the 50th percentile. In 2013 and 2014, OSM set pay for most of the Top 25 employees at Ally above the 50th percentile. Given that Ally is the only company remaining under OSM’s jurisdiction, OSM no longer follows the original guideline that total pay generally not exceed the 50th percentile. SIGTARP found OSM’s policy and procedures to be confusing and applied inconsistently, making oversight difficult and lending to a lack of accountability of OSM. Cash salaries are a prime example of how a lack of robust policies, procedures, guidelines, and criteria can lead to Treasury going along with company requests for excessive pay without adhering to OSM’s own objective criteria. For example, although OSM’s policy and procedures are silent as to the 50th percentile previously used by OSM under Special Master Feinberg to determine total compensation, OSM’s April 2013 pay determination letters to the companies state that OSM has concluded that cash salaries generally should target the 50th percentile as compared to persons in similar positions or roles at similar entities. With respect to cash salaries, GM proposed 12 and Ally proposed 9 employees to receive a cash salary exceeding cash salary medians for a total of $1.5 million exceeding median cash salary, and OSM agreed to 90% of those requests. OSM further appears to have eliminated the requirement that good cause be shown before authorizing a cash salary over $500,000, thereby loosening a check and balance available to limit excessive compensation. Why this matters: Without any criteria to ensure that it consistently applies its own “conclusion” to target cash salaries at the 50th percentile, OSM approaches it on a case-by-case determination as proposed by the company. SIGTARP found that OSM approved 90% of the company’s proposals (19 of 21 employees) for salaries to exceed cash market medians. Some of these cash salaries exceed the 50th percentile significantly. Treasury approved these cash salaries to exceed market medians by amounts ranging from $6,800 to $187,000 for a total of $1.3 million without a specific link to the establishment of good cause. Following is a detailed list of each approved cash salary that exceeded market medians: Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 19 TABLE 1 OSM-APPROVED 2013 CASH SALARIES EXCEEDING MARKET MEDIANS Amount of Cash Salary OSM Approved over Market Median Employee ID Number Company 931656 Ally $304,000 $491,000 $187,000 197253 Ally $324,000 $500,000 176,000 104428 Ally $398,000 $491,000 93,000 5046 GM $390,000 $475,000 85,000 3774 GM $402,500 $485,000 82,500 Market Median Cash Salary OSM-Approved Cash Salary 2387 GM $416,000 $495,000 79,000 682168 Ally $525,000 $600,000 75,000 105336 Ally $425,000 $500,000 75,000 1565 GM $420,000 $495,000 75,000 1223 GM $425,000 $495,000 70,000 6524 GM $435,000 $495,000 60,000 9859 GM $475,000 $525,000 50,000 380289 Ally $342,000 $391,000 49,000 9074 GM $378,000 $425,000 47,000 7537 GM $566,000 $600,000 34,000 707713 Ally $525,000 $550,000 25,000 725547 Ally $485,000 $500,000 15,000 567303 Ally $485,000 $500,000 15,000 0230 GM $488,200 $495,000 6,800 Total $1,299,300 Source: SIGTARP analysis of OSM’s 2013 determination memorandums and company proposals. $500,000 Cash Salary: OSM’s prior “prescription,” or guideline, was that generally salaries should not exceed $500,000 per year, except for good cause shown – a guideline much stronger than what OSM currently follows. OSM’s newly written procedures dated June 2013 state: “Base salary paid in cash should in most cases not exceed $500,000.” OSM appears to have changed OSM’s standard to one where a majority of cash salaries not exceed $500,000 and removed the requirement that tied the increase to “for good cause shown.” Stock Salary and Long-Term Restricted Stock: OSM previously determined the amount of stock salary and long-term restricted stock by deducting the cash salary from total compensation. Under the methodology set up by former Special Master Feinberg, because the Recovery Act limited long-term restricted stock to Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 20 one-third of the employee’s total pay, OSM first calculated the amount of longterm restricted stock, and the remainder of the compensation package was stock salary. As reported in SIGTARP’s 2012 report, to tie individual compensation to long-term company success, OSM previously used long-term restricted stock contingent on the employee achieving specific performance criteria. Long-term restricted stock does not fully vest until the repayment of TARP financial assistance – the very type of stock referenced in the President’s announcement. SIGTARP previously reported that, for 2012 pay, OSM removed long-term restricted stock based on the companies’ requests. When setting pay for 2013, OSM included an extremely limited amount of long-term restricted stock (effectively 5%), and when setting pay for 2014, OSM removed it altogether on Ally’s request. Therefore, Treasury has approved that none of the Top 25 employees have pay that is tied to individual performance metrics related to the long-term performance of the company, or that cannot be paid until taxpayers are paid back. This removes an incentive for individuals to work toward repaying TARP. Why this matters: By moving further and further away from the President’s announced pay reforms and prior Treasury pay limits, OSM has moved closer and closer to the TARP companies’ proposed pay, and in doing so has cut back an important incentive that previously existed in pay limits and motivated Bank of America and Citigroup to repay TARP. As with SIGTARP’s earlier reports, SIGTARP found once again that these TARP companies receiving exceptional assistance failed to take into account the exceptional situations that necessitated their financial rescues. Their lack of appreciation is evident in Ally’s and GM’s proposed excessive compensation for their employees in asking for pay raises, higher cash salaries, and removal of long-term restricted stock, even though the companies were not repaying taxpayers in full, resulting in billions in losses. Staying in TARP well beyond all other large TARP recipients does not mean that the return to taxpayers (OSM’s overriding principle) is getting better. At last year’s Congressional hearing on SIGTARP’s report, former Special Master Feinberg submitted for the record a letter in which he states that the market and economy have changed since OSM was established and that the initial pay prescriptions promulgated during his tenure may still be valid and credible, but waivers and exceptions are to be more frequent and expected in light of changing market conditions. Changes in the market should already be taken into account in OSM-approved pay through the use of a market median (the 50th percentile). Good Government requires objective standards and criteria set by the Government, rather than a standard of how many excessive pay requests by companies Treasury grants. Treasury must hold the line, or risk that exception Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 21 will give way to another exception subjecting Treasury to criticism of rewarding top employees at a company unable to repay TARP at the expense of taxpayers already suffering losses and at the expense of cutting back on needed financial crisis reforms and a possible deterrent to future bailout requests. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 22 In 2013, Treasury Approved at Least $1 Million in Pay for Every Top 25 Employee at GM and Ally, and Approved Total Compensation that Was More Than 28% Higher Than 2009 Pay By 2013, Treasury significantly loosened restrictions on total compensation. Last year, SIGTARP reported that, for 2012 pay, Treasury approved that all but one employee be paid at least $1 million. For 2013, Treasury approved pay packages worth at least $1 million for every Top 25 executive at GM and Ally. That means that Treasury approved that every employee for whom it sets pay in 2013 be paid $1 million or more, significantly more than pay approved in 2009 and 2010. While $1 million was the floor for Treasury-approved pay for top employees at GM and Ally in 2013, Treasury approved many to be paid much more, with an average pay of $3 million per employee.6 In 2009, Treasury approved $101 million in total compensation for 43 GM and Ally Top 25 employees, for an average of $2.4 million. Despite GM and Ally being the last two large companies in TARP in 2013, Treasury increased pay by 28% over 2009 pay amounts. In 2013, Treasury approved $142 million in total compensation for 47 GM and Ally Top 25 employees, for an average of $3 million. Treasury approved total compensation of more than $5 million ($5.2 million to $9.5 million) for seven employees at GM and Ally. Treasury approved total compensation packages ranging from $3 million to $4.71 million for 9 additional GM and Ally employees, and 31 pay packages ranging from $1 million to $2.9 million. The pay Treasury awarded most of these employees in 2013 exceeded the market median based on comparable positions and companies as determined by Treasury. GM proposed 16 and Ally proposed 18 employees to receive total compensation exceeding market medians by a total of $24.5 million. Treasury set pay for 88% (30 of 34 employees) of these proposed employees, which exceeds market medians. On an individual basis, these pay packages exceeded market medians by amounts ranging from $17,700 to $2.7 million, for a total of $22.9 million. Of the 30, Ally received 18 and GM received 12. For a detailed list of the pay packages that exceeded market medians, see Appendix E. 6 The 2013 pay determinations are located in Appendices B and C. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 23 Why this matters: Former Special Master Feinberg recounts in his book Who Gets What that Congress wanted limitations on pay at TARP recipients because constituents would be appalled at the idea of Congress using public funds to rescue private companies headed by corporate chieftains earning millions of dollars. SIGTARP has serious concerns that Treasury is rewarding top employees with increased multimillion-dollar pay at companies that were not repaying TARP, leaving Treasury to sell the shares into the market at a significant loss to taxpayers. This leaves Treasury subject to criticism that it rewards top executives of companies unable to repay their bailouts over the very taxpayers who lost billions of dollars on those bailouts. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 24 Treasury Tripled the Number of GM and Ally Employees Paid More than $500,000 in Guaranteed Cash Salaries from 2009 to 2013 and Allowed 89% of the Employees To Be Paid Cash Salaries of $450,000 or More Former Special Master Feinberg recounts in his book one principle he followed was “Guaranteed cash salary would be limited to $500,000 per year; any additional amount would require special master approval. (In the end, fewer than 10 percent of the officials in the seven companies received such approval.)” OSM loosened the restriction threefold in 2013, giving more than one-third (34%) of employees under OSM’s pay-setting jurisdiction guaranteed cash salaries of more than $500,000. In 2009, Treasury held the line on guaranteed cash salaries over $500,000 to two GM employees and three Ally employees using the Treasury guideline that cash salaries should generally not exceed $500,000. By 2013, Treasury tripled the number of GM and Ally employees paid more than $500,000 in cash from the 5 employees in 2009 to 16 employees. SIGTARP in its two prior reports raised serious concerns about how Treasury was approving more and more employees to be paid guaranteed cash salaries of more than $500,000 without objective criteria, then allowing more and more employees to fall just under that threshold. In 2013, OSM approved 84% (16 of 19) company-proposed cash salaries exceeding $500,000. These salaries exceeded $500,000 by an aggregate $3.6 million.7 Beyond this Treasury guideline, SIGTARP also found that OSM was not following the spirit of the guideline to limit guaranteed cash salaries. OSM allowed 89% (42 of 47) of all Top 25 employees at GM and Ally to be paid guaranteed cash salaries of $450,000 or more, including 8 employees paid cash salaries of exactly $500,000. A detailed list of each cash salary that exceeded $500,000, ranging from $525,000 to $1,700,000, follows: 7 Of the 16 approved cash salaries that exceeded $500,000, Ally received 6 and GM received 10. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 25 TABLE 2 APPROVED CASH SALARY FOR 2013 OVER $500,000 Company Name Employee ID Approved Annual Base Salary (cash) GM 4859 $1,700,000 GM 94 950,000 GM 2986 750,000 GM 7459 750,000 GM 5555 750,000 GM 5697 750,000 GM 3348 650,000 Ally 265967 600,000 Ally 102645 600,000 Ally 339212 600,000 Ally 682168 600,000 GM 5021 600,000 GM 7537 600,000 Ally 546145 591,000 Ally 707713 550,000 GM 9859 525,000 Source: SIGTARP analysis of OSM’s 2013 determination memorandums. To ensure consistent and objective decision making, SIGTARP previously recommended that Treasury substantiate decisions on whether company requests demonstrate or fail to demonstrate “good cause” for approving cash salaries exceeding $500,000 and for approving pay raises. SIGTARP also recommended that Treasury develop policies, procedures, and criteria for approving pay in excess of Treasury’s guidelines. OSM’s documentation of its justifications has changed from last year, but continues to lack a showing of OSM’s independent analysis as SIGTARP recommended. The justifications include the company’s assertions and statements about where the employee’s compensation fell compared to peers (as determined by data provided by the company). The justifications do not show that OSM conducted independent analysis (as recommended by SIGTARP) to verify some of the assertions companies made, such as that employees were retention risks or crucial or analyzed beyond discussing the assertions with the companies and/or other Treasury officials or reading about the employees in newspaper articles. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 26 Why this matters: OSM’s job is to look out for the interests of taxpayers, which it cannot do if it continues to rely so heavily on the company’s justifications and requests without independent analysis. OSM’s continued argument that there is no $500,000 cash salary cap (as the President announced) misses the bigger risk of guaranteed high cash salaries. As SIGTARP reported in its 2012 report, according to OSM, OSM’s prior restriction that generally salaries should not exceed $500,000 per year was based in part on the President’s statement. SIGTARP also reported that former Special Master Feinberg said the decision to limit cash salaries to $500,000 and to increase the proportion of compensation in the form of stock was to strike a balance between reducing excessive risk and providing enough compensation to keep employees’ “skin in the game.” The President’s announced cap was a reform based on a material cause of the financial crisis. Weakening that restriction on executive compensation could have the very dangerous effect of not providing enough skin in the game and could tip the balance toward excessive risk. Treasury’s Rule states that compensation structures should avoid incentives to take unnecessary or excessive risks that could threaten the value of the TARP recipient. In 2013, Treasury Approved $3 Million in Pay Raises for Nine GM Employees, Most of Whom Received Pay Raises in Consecutive Annual Years In 2013, Treasury approved a pay raise for each of the nine employees previously in the Top 25 for whom GM had requested a pay raise. These raises were worth approximately $3 million in 2013, as shown in the following table: Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 27 TABLE 3 GM EMPLOYEE PAY RAISES Pay Raise GM Employee 2012 Total Pay ($) (%) 2013 Total Pay 1 $4,850,000 $490,000 10 $5,340,000 2 4,250,000 460,000 11 4,710,000 3 5,400,000 450,000 8 5,850,000 4 4,300,000 410,000 10 4,710,000 5 5,000,000 325,000 7 5,325,000 6 2,925,000 300,000 10 3,225,000 7 1,332,500 267,500 20 1,600,000 8 2,150,000 250,000 12 2,400,000 9 2,100,000 75,000 4 2,175,000 $32,307,500 $3,027,500 Total $35,335,000 Source: SIGTARP analysis of OSM’s 2012 and 2013 determination memorandums. By several measures, the 2013 pay raises were excessive. First, Treasury raised the employees’ pay by an average of 9.4% as a group (from $32.3 million in 2012 to $35.3 million in 2013). This exceeded the June 2013 Consumer Price Index (“CPI”) of 1.8%, which is a measure of inflation in the prices of goods/services, by 422%. On an individual basis, each of the nine raises also exceeded the CPI, with the lowest raise 4% and the highest raise 20% more than the employees’ 2012 compensation. Average total compensation for the nine individuals before the pay raises was $3.6 million, or approximately 7,000% higher than median household income in 2012, which was approximately $51,000, according to the U.S. Census Bureau. The nine employees’ average total pay after the raises exceeded 2012 median household income by approximately 7,600%. Eight of the nine employees also received raises in 2012 (two consecutive years), and five of these employees also received raises in 2011 (three consecutive years). The following table shows these pay raises: Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 28 TABLE 4 GM EMPLOYEE PAY RAISES FOR 2013 GM Employee 2010 Total Pay 2011 Total Pay Pay Raise Employees Who Received Three Consecutive Annual Raises 5697* $2,436,900 $3,500,000 $1,063,100 2986* $2,778,850 $3,500,000 $721,150 4894* $2,120,050 $2,550,000 $429,950 9635* $1,800,000 $1,900,000 $100,000 3348* $2,024,750 $2,050,000 $25,250 Employees Who Received Two Consecutive Annual Raises 5555 $4,200,000 ** n/a 5021 $5,300,000 ** n/a 7459 $4,200,000 ** n/a Employee Who Received One Raise 3199 ** Total Raises ** n/a $2,339,450 2012 Total Pay Pay Raise 2013 Total Pay Pay Raise Total Pay Raises $4,300,000 $800,000 $4,250,000 $750,000 $2,925,000 $375,000 $2,150,000 $250,000 $2,100,000 $50,000 $4,710,000 $410,000 $4,710,000 $460,000 $3,225,000 $300,000 $2,400,000 $250,000 $2,175,000 $75,000 $4,850,000 $650,000 $5,400,000 $100,000 $5,000,000 $800,000 $5,340,000 $490,000 $5,850,000 $450,000 $5,325,000 $325,000 $1,125,000 $1,332,500 n/a $1,600,000 $267,500 $267,500 $3,775,000 $3,027,500 $9,141,950 $2,273,100 $1,931,150 $1,104,950 $600,000 $150,250 $1,140,000 $550,000 Source: SIGTARP analysis of OSM’s 2010 through 2013 determination memorandums. *Denotes these GM employees were not in the Top 25 in 2009. **Denotes the GM employee was not among the Top 25 in that year. OSM has not established meaningful criteria for the approval of pay raises or conducted independent analysis on pay raise requests for each employee as SIGTARP previously recommended. When SIGTARP asked Acting Special Master Geoghegan why she approved these pay raises, she told SIGTARP that almost all of them were below median. And these are people who have enormous responsibilities with regard to GM. And it is important, as you know, that GM remain competitive so that it can retain and recruit employees and so that it can maximize the return to taxpayers of the amounts owed under TARP. Geoghegan also said that some employees had “expanded responsibilities.” The reasons the Acting Special Master gave to justify pay raises are the very things historically cited by the companies to justify proposals for excessive pay. In 2012, SIGTARP reported that, given OSM’s overriding goal (of TARP repayment), the seven companies had significant leverage over OSM by proposing and negotiating for excessive pay packages, warning Special Master Feinberg that if he did not provide competitive pay packages, top officials would leave and go elsewhere, a claim that he said, at that time in October 2010, did not Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 29 come true as 85% of the people were still at the companies.8 Worse yet, unlike in 2009 and 2010, this is not the same situation because GM and Ally are not repaying taxpayers in full. After these companies did not repay taxpayers in full during these years, Treasury made the decision not to hold the stock but instead to sell it into the market (and some back to GM) at substantial losses. Given the lack of any meaningful criteria and lack of any documentation of independent analysis for each employee, it is not transparent how OSM makes decisions on pay raises separate from the company’s assertions. If OSM followed its own process, pay for all employees should generally not exceed the market median (as determined by the companies). Therefore, it is unclear if OSM now is using pay raises to get the person to the market median. Why this matters: Without objective criteria, OSM is making decisions on pay raises based on the company’s requests and threats about retention. The question should not be how many of the company-requested pay raises should be allowed, but rather should OSM be granting any pay raises for these companies that have been stuck in TARP and, if so, what is the justification for doing so. The companies continue requesting pay raises and Treasury keeps granting pay raises without regard for the fact that these companies are not repaying TARP in full and taxpayers are suffering losses. OSM cites the possibility of repayment to taxpayers for justification of pay raises, but these companies are not repaying taxpayers in full. Instead, Treasury is selling the stock into the market, and incurring billions of dollars in losses. Moreover, Treasury is awarding pay raises in excess compared to average households that continue to fund these very companies, raising some employees’ pay year after year. 8 Former Special Master Feinberg wrote in his book that it was not clear that the departure of the 15% who left was tied to compensation. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 30 Treasury Has Eliminated Long-Term Restricted Stock Tying Pay to Individual Performance and TARP Repayment, Which Was Typically One-Third of Compensation Packages in 2009, and Loosened Time Restrictions When Employees Can Cash Out Company Stock In his book, former Special Master Feinberg described Treasury’s principle of performance-based compensation as “the heart and soul of the regulations.” He wrote: Only an executive’s base salary is guaranteed. The remainder of the compensation package depends on individual and corporate performance over at least three years. Short-term corporate success should not trigger additional compensation; instead the regulations focus on extended corporate growth. Corporate officials and the companies they manage should be joined at the hip when it comes to compensation. OSM historically had used two types of stock in pay. The first is company stock, which accrues at the same time as cash salary paid and which is not contingent on an employee meeting individual performance metrics. Although the stock vests each pay cycle, it is generally redeemable (can be cashed out) only in three equal installments, beginning on the second anniversary of the grant date. The second is long-term restricted stock that is contingent on the employee meeting individual performance metrics and remaining at the company for three years. Long-term restricted stock vests after the three years, but can only be redeemed by the employee in 25% installments for each 25% of TARP obligations that are repaid. OSM cut back on both of these important pay limits. Treasury accelerated when top employees can cash out company stock as part of salary: The impact of OSM cutting long-term restricted stock to little to nothing is that the pay that historically came in the form of long-term restricted stock would come in the form of company stock, which is earned by employees in every paycheck. Along with significantly increasing the amount of this company stock, in 2013 OSM continued its practice of loosening restrictions on when employees at GM and Ally could cash out this stock, giving yet again another benefit to those companies’ employees and cutting back on a retention tool. SIGTARP reported in 2012: “In testimony to the House Committee on Oversight and Government Reform, the Special Master [Feinberg] said that he used stock salary to encourage Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 31 senior executives to remain at the companies to maximize their benefit from the profitability of the company.” In 2013, OSM made the decision that “because GM has made significant repayments of the Company’s TARP obligations, each redemption date of 2009, 2010, 2011, 2012, and 2013 stock salary may be accelerated by one year.” Acting Special Master Geoghegan did something similar for Ally. Why this matters: SIGTARP has serious concerns about OSM’s decision to accelerate when employees can cash out company stock. First, not only did OSM continue its practice to loosen this restriction on pay, which removes a retention tool, but OSM made a decision that has the impact of giving the top employees the opportunity to get cash quicker than they ever would have. In other words, OSM just gave more guaranteed cash and removed more of employees’ “skin in the game.” Second, SIGTARP questions OSM’s rationale to allow Ally and GM employees to redeem stock salary early. OSM’s policies, procedures, guidelines, and determination letters state stock salary can be redeemed early (after the first anniversary as opposed to after the second anniversary of when the stock salary is earned) if the company has begun to repay its TARP obligations. OSM, under these vague guidelines, permitted Ally and GM employees to receive accelerated stock salary, even though both companies’ TARP repayments, which largely constituted Treasury’s sales of Ally and GM common stock, left taxpayers shouldering billions of dollars in losses. Third, although there are some written criteria for accelerating stock redemption based upon companies beginning to repay TARP, some of the repayments were actually Treasury’s sale of stock in the open market, which led to billions of dollars in losses. This seems to be a perfect example of how OSM’s lack of policies, procedures, guidelines, and criteria for decision making led to OSM being swayed by a company request that serves to reward top employees and remove limits on pay. Treasury removed long-term restricted stock from pay: In addition, over the last three years, OSM got further and further away from using long-term restricted stock as a limit on pay – previously the “heart and soul” of Treasury’s limits on pay – eliminating it in 2014 as shown by the following chart.9 9 The Acting Special Master did not approve long-term restricted stock for Ally employees in 2012 and 2014. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 32 FIGURE 2 AGGREGATE LTRS AS A PERCENTAGE OF AGGREGATE TOTAL COMPENSATION FOR TOP 25 EMPLOYEES 2009-2014 Source: SIGTARP analysis of OSM’s determination memorandums. *There were seven companies in 2009 receiving TARP exceptional assistance (AIG, Ally, Bank of America, Citigroup, GM, Chrysler, Chrysler Financial; five companies in 2010 (AIG, Ally, Chrysler, Chrysler Financial, GM); four companies in 2011 (AIG, Ally, Chrysler, GM); three companies in 2012 (AlG, Ally, GM); two companies in 2013 (Ally and GM); and one company in 2014 (Ally). After raising serious concerns that Treasury removed long-term restricted stock for every Ally employee in 2012, SIGTARP recommended that Treasury return to using long-term restricted stock. Treasury’s response was paltry at best. In 2013, Treasury approved five GM employees to not receive any long-term restricted stock as a limit on pay (one more than in 2012), and Treasury effectively approved a blanket 5% of the Ally employees’ pay in long-term restricted stock.10 10 In 2013, Treasury approved 10% of Ally employees’ total pay in the form of long-term restricted stock, but effectively it was only half of that amount (5%) because it was pro rata as of July 1, 2013, meaning that prior to that date it was delivered as stock salary. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 33 OSM’s blanket award of 5% is inconsistent with Treasury’s Rule that the portion of performance-based compensation should be greater for positions in which employees exercise higher levels of responsibility.11 OSM’s decision to allocate effectively only 5% of Ally employees’ pay in the form of long-term restricted stock is also inconsistent with OSM’s 2013 determination memorandum, which states: “In most circumstances a large proportion of compensation should be held or deferred for a period of at least three years.” A 5% allocation of long-term restricted stock is not by any measure a “large portion.” SIGTARP reported in 2013 that OSM had no documented criteria for taking away long-term restricted stock, leading to a lack of accountability and transparency. SIGTARP reported that Acting Special Master Geoghegan told SIGTARP at that time that when OSM takes away long-term restricted stock, it is because the individual may be very senior, may wish to retire, or otherwise will be leaving. In September 2013, under this evaluation, the Acting Special Master told SIGTARP that long-term restricted stock is not appropriate when the employee is nearing retirement or when the company is in the process of restructuring and possibly disposing of divisions in which case executives may have their jobs eliminated. She also told SIGTARP that she eliminated long-term restricted stock for top Ally employees in 2012 because a lot of these executives were at risk of losing their jobs. This is a perfect example of a lack of written objective criteria by which Treasury makes decisions, with OSM parroting the reason Ally gave OSM for its request to eliminate this pay limit. It is also an example of a lack of independent analysis by OSM to verify what the company told her. SIGTARP’s 2013 report found that OSM removed this important pay limit for all Top 25 Ally employees in 2012, even though only three of those employees worked at Residential Capital, LLC (Ally’s financial mortgage subsidiary that filed for bankruptcy on May 14, 2012). Moreover, most of Ally’s Top 25 employees in 2012 remained among Ally’s Top 25 in 2013. When asked why OSM approved so little long-term restricted stock for Ally employees in 2013, the Acting Special Master told SIGTARP that she wanted to keep in place Ally’s 2012 compensation structure (where none of the employees had long-term restricted stock) while moving to a more standard pay structure. In May 2013, Ally requested that OSM revise 2013 pay to eliminate all long-term restricted stock and replace it with stock salary, citing the company’s ongoing restructuring and difficulty with retention. OSM declined the request in June 2013, only to eliminate all long-term restricted stock 10 months later, under the 2014 determinations, at the request of Ally. 11 OSM’s determination memorandum states that Ally’s long-term restricted stock for 2013 is effective pro rata as of July 1, 2013, and prior to that date will be delivered as stock salary. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 34 Why this matters: In 2012, and again in 2014, Treasury completely removed long-term restricted stock from every Ally employee’s pay package, removing a key incentive for individual employees to work toward repaying taxpayers and important limits and reforms on executive pay at TARP companies. Treasury’s removal of long-term restricted stock contradicts two of the six principles outlined in Treasury’s Rule: 1) performance-based compensation – an appropriate portion of the compensation should be based on performance metrics; and 2) appropriate allocation – the compensation structure should appropriately allocate compensation between components such as salary and short-term and long-term incentives. While OSM has kept stock salary as part of pay packages, the value of that stock is based on the company’s performance, not on individual performance metrics. Long-term restricted stock is based on individual performance related to metrics tied to the long-term success of the company and repaying taxpayers. In SIGTARP’s 2012 report, SIGTARP reported that OSM used long-term restricted stock to tie individual compensation to long-term company success. Now that Treasury has removed it from pay packages, no individual has to meet any performance metric to receive their pay or wait until taxpayers are paid back, just as Ally wanted. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 35 Conclusion Former Treasury Secretary Timothy F. Geithner said that executive compensation played a material role in the financial crisis. As restraint in exchange for taxpayer bailouts, Congress and the President announced that Troubled Asset Relief Program (“TARP”) recipients would be required to abide by certain rules on executive compensation, rules that the U.S. Department of the Treasury (“Treasury”) was required to promulgate. In February 2009, the President announced “reforms” that “top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000, a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can’t be paid up until taxpayers are paid back for their assistance.” After the President’s announcement, Treasury promulgated a rule that listed six principles to keep pay for TARP companies in the interest of taxpayers, principles that Treasury’s former Special Master for TARP Executive Compensation (“Special Master”) Kenneth R. Feinberg found inherently inconsistent. Therefore, he developed a three-step methodology using what he called “prescriptions,” or guidelines, that Treasury’s Office of the Special Master for TARP Executive Compensation (“OSM”) used to set pay for the Top 25 employees at seven companies that had received exceptional assistance under TARP. In 2012, the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) reported that it found that the Special Master could not effectively rein in excessive compensation because he was under the constraint that his most important goal was to get the companies to repay TARP (one of Treasury’s six principles). Given OSM’s overriding goal, the companies had significant leverage by proposing and negotiating for excessive pay, warning that if he did not provide competitive pay packages, top officials would leave and go elsewhere, a claim that he said did not come true. The former Special Master recounts in his book, Who Gets What: Fair Compensation after Tragedy and Financial Upheaval (“Who Gets What”) that the primary goal in determining payments for corporate officials was to maximize the likelihood that the companies would repay TARP as quickly as possible because the taxpayers had to be made whole. SIGTARP reported in 2012 that, although OSM limited cash compensation and made some reductions in pay, OSM still approved total compensation in the millions. In 2013, SIGTARP published a second report that Acting Special Master Patricia Geoghegan rolled back OSM’s application of guidelines aimed at curbing excessive pay, effectively relinquishing some of OSM’s authority by relying to a great extent on the companies’ pay proposals or justifications rather than robust policies, procedures, or criteria to ensure that OSM’s guidelines are met. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 36 By April 2013, when Treasury’s OSM set 2013 pay, it found itself with an incredibly narrow and limited job because there were only two companies left in its jurisdiction. OSM touted as the ultimate metric of success for its pay decisions the fact that the other five companies had exited TARP with taxpayers being made whole (even though some of those companies did not repay but Treasury sold their stock in the market). General Motors Corporation (“GM”) and its prior auto financing arm General Motors Acceptance Corp. (“GMAC Inc.,” rebranded as Ally Financial Inc. (“Ally”)) were not only the last two companies under OSM’s jurisdiction, they were the last two large companies still in TARP after four years. GM and former GMAC were having trouble repaying TARP in full, taxpayers had suffered losses on both investments, and the Government estimated final losses of $20 billion to $25 billion on the auto bailout (including losses on GM, Ally, and the $2.9 billion loss taxpayers suffered from the TARP investment in Chrysler Holding LLC (“Chrysler”). Having not received TARP repayments in full from GM and Ally, Treasury made the decision to sell the TARP stock in GM into the market and allowed GM to buy back some of the stock, both at significant losses. When Treasury’s OSM set 2013 pay, taxpayers had already lost $8.2 billion on the TARP investment in GM. Ally had made no repayments of the principal TARP investment. While Ally was under a March 2013 failed stress test, taxpayers suffered a loss of $845 million when Treasury sold Ally common stock in the market. SIGTARP evaluated Treasury OSM’s determinations of 2013 pay for GM and Ally Top 25 employees. While SIGTARP was conducting this evaluation, Treasury sold its remaining TARP shares of GM into the market to arrive at a total loss to taxpayers of $11.159 billion, and sold some of its Ally common stock into the market to arrive at total losses of $1.8 billion. In April 2014, OSM’s job got even narrower as it set 2014 pay for the Top 25 employees at only one company, Ally. SIGTARP found that Treasury continued to award excessive pay by approving some of the companies’ requests for pay raises and high guaranteed cash salaries, and approving the companies’ requests to accelerate the time limit for corporate officials to cash out company stock received as pay, and to eliminate pay tied to individual performance metrics and the repayment of TARP (long-term restricted stock). SIGTARP found that after making the pay determinations in April 2013, Treasury made limited progress since SIGTARP’s last report but did not make the meaningful reforms needed and previously recommended by SIGTARP. In June 2013, OSM created for the first time a written policy and procedures. However, these appear to be an attempt to document what OSM had done historically without meaningful change as SIGTARP recommended. OSM’s policy merely recites TARP legislation and the Treasury Rule, both in existence prior to the establishment of OSM, leaving OSM as an office of Treasury that operates without formal written policies developed by that office. SIGTARP found that Treasury did not have robust policies, procedures, or criteria to ensure Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 37 that OSM’s guidelines are met. Two aspects of Treasury’s pay-setting process and pay decisions serve as important lessons learned. First, loosening limits on executive compensation for companies unable to repay TARP subjects Treasury to criticism that it is rewarding top executives at companies that are losing taxpayers’ money over the interests of the taxpayers already shouldering billions of dollars in losses on those investments. SIGTARP found the same thing that it reported in 2012 – that it continues to be the case that, given OSM’s overriding goal of repayment to taxpayers, GM and Ally had significant leverage by proposing and negotiating for excessive pay, warning that if OSM did not provide competitive pay packages, top officials would leave and go elsewhere. We note that this is a claim that Feinberg said did not come true. GM and Ally continued to lack an appreciation for their situation and were notably persistent in proposing more and more pay with fewer and fewer restrictions for their top officials. Every year they sought exception after exception to OSM’s guidelines. Bowing to the scare tactics of companies that employees would leave if OSM did not approve their proposed pay, in 2013 OSM continued to make pay decisions in a process that was ad hoc and inconsistent. OSM made decisions based on which of the company’s proposals it would approve, rather than using independent objective criteria designed to adhere to OSM’s pay guidelines. The result has been that, every year, Treasury awarded corporate officials at TARP companies more and more exceptions to Treasury’s pay guidelines, which appears to have encouraged the companies to propose more exceptions each year. Treasury-approved exceptions to its own guideline restrictions on executive compensation added up incrementally such that by OSM’s fifth year, 2013, OSM had gotten further and further away from the President’s announcement and OSM’s prior guidelines, even as taxpayer losses mount. SIGTARP found the following: Report Number 14-001 In 2009, Treasury’s guideline was to set pay to “generally not exceed the 50th percentile” of what their peers made. Treasury appears now to have done away with this guideline and by 2014 set most of Ally’s pay between the 50th and 75th percentile. Treasury-approved pay increased 28% for GM and Ally Top 25 employees from 2009 to 2013. Treasury awarded average pay of $3 million in 2013 to GM and Ally Top 25 employees. In 2013, Treasury approved $3 million in aggregate pay raises for nine GM employees, most of whom received pay raises in consecutive annual years. Those raises were excessive. The pay raises ranged from 4% to 20%, averaging 9.4%, which exceeded the June 2013 1.8% Consumer Price Index September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 38 (a measure of inflation) by 422%. Treasury awarded these nine employees pay that exceeded the 2012 median household income, according to the U.S. Census Bureau, by 7,600%. In 2013, Treasury approved 19 of 21 (90%) of the employees for whom GM and Ally had requested cash salaries that would exceed the median. By 2013, Treasury had loosened its guideline that guaranteed cash salary would be limited to $500,000 per year, which was based on the President’s statement that cash salaries not exceed that threshold. Treasury’s June 2013 guideline states: “Base salary paid in cash should in most cases not exceed $500,000.” In 2009, Treasury awarded fewer than 10% of the officials in the seven companies to be paid cash salary in excess of $500,000, which tripled (34%) by 2013. In 2009, Treasury awarded 5 employees of GM and Ally cash salaries greater than $500,000, which tripled to 16 employees by 2013. In 2013, Treasury allowed almost all of the remaining Top 25 employees at GM and Ally to be paid cash salaries of $450,000 or more. Typically one-third of compensation in 2009 for Ally and GM, Treasury has eliminated long-term restricted stock as part of pay for Ally in 2012 and 2014, which is the type of stock referred to by the President, and the only stock tying individual performance to TARP repayment. Treasury loosened time restrictions by a full year for employees to cash out company stock received as pay. Just as SIGTARP found in its January 2013 report, SIGTARP found that Acting Special Master Patricia Geoghegan continued to roll back OSM’s application of guidelines aimed at curbing excessive pay, effectively relinquishing some of OSM’s authority by relying to a great extent on the company’s pay proposals or justifications rather than robust policies, procedures, or criteria to ensure that OSM’s guidelines are met. OSM is granting many company requests without independent analysis but instead based on the companies’ justification that the employees had enormous responsibilities and these exceptions are needed to retain the employees. While compensation committees at corporations may work like this, it is not good Government practice to get further and further away from important guidelines by approving exception after exception. Treasury has allowed OSM to not implement six of seven SIGTARP recommendations that were designed to keep OSM accountable to guidelines limiting excessive pay. A lack of robust criteria, policies, and procedures to ensure that guidelines are met leads to a lack of transparency, inconsistency, and ultimately a lack of accountability to taxpayers. The pendulum in OSM’s pay decisions has swung too far in the direction of keeping companies competitive, without regard for the fact that the reason to keep companies competitive is so that they can repay taxpayers in full, but GM and Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 39 Ally were not repaying taxpayers in full. Rather, taxpayers have suffered billions of dollars in losses on those TARP investments. There should be no expectation on the part of the companies or Treasury that pay should increase as companies get farther in time from the crisis because that theory does not take into account the fact that four years have not led these companies to repay taxpayers fully. GM’s stock price never rose near to Treasury’s break-even price, but Treasury continued to award pay raises, cash in excess of $500,000, and multimillion-dollar pay. Treasury’s pay decisions suggest that OSM’s overriding objective/principle of “repayment of TARP” inures to the benefit of top executives at TARP companies when Treasury sets pay. According to Feinberg’s book, Secretary Geithner’s primary concern was “compensation should reflect the need for the company to recruit and retain key employees so the company ultimately could repay every cent borrowed. Pay back the taxpayers – with interest. Every company subject to my jurisdiction, and much of the Treasury bureaucracy, referenced this variable in urging the special master to be generous when it came to compensation.” Feinberg was referring to his role in 2009 and 2010, but since then GM and Ally have had much trouble repaying TARP fully, which is not reflected in OSM’s pay decisions. If Treasury wants to use “repayment of TARP” as a factor to approve “generous” pay, the lack of full repayment of TARP by GM and Ally should likewise be reflected by Treasury to limit or maintain pay, but not to loosen restrictions on pay more and more each year. Taxpayers are already subsidizing losses on TARP investments in these companies and should not be forced by Treasury to subsidize excessive executive compensation. Second, by setting pay further and further away from the President’s and Treasury’s announced limitations on executive compensation for TARP company officials, Treasury is missing an opportunity for critical reforms to a material cause of the financial crisis and a strong deterrent to future bailouts. Even though six of the seven TARP exceptional assistance companies are no longer in TARP, having strong restrictions on executive compensation at TARP companies remains critical for the future. Should a future bailout occur, it is important to have two playbooks. The first playbook the public needs would describe how Treasury and other Government officials actually made decisions in the TARP bailout, which requires transparency through written policies and procedures and good documentation. SIGTARP’s reports bring as much transparency to this decision making as is possible, but ultimately we are limited due to the lack of robust policies and procedures, and the ad hoc nature by which OSM makes decisions. The second playbook the public needs would describe how the Government could have improved, as determined by oversight agencies such as SIGTARP, so that future Government officials faced with the possibility of a bailout with limited time, have a go-to guide for best practices in decision Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 40 making. In the height of the crisis, when the Government was making much of its decisions, a lack of some documentation or some objective criteria was to be expected for first-of-their-kind decisions. It was one thing in 2009 for OSM to operate without written policies, procedures, and criteria when OSM officials were just trying to get their hands around a wealth of information on pay at these companies. However, there is no excuse now for OSM to not have objective criteria to keep OSM accountable to strong limits on pay at TARP companies. Moreover, OSM loosening restrictions on pay could have the effect of loosening incentives for individual corporate executives to work toward their company repaying TARP. Bank of America Corporation and Citigroup Inc. told SIGTARP that the limits on executive compensation motivated them to get out of TARP’s exceptional assistance programs as soon as they could in 2009. Ally is still in TARP today, and the Government should be keeping every incentive it has to get Ally to repay TARP. Now no individual at Ally has to meet any performance metric to receive their pay or wait until taxpayers are paid back (as the President announced). This is just what Ally wanted. Removing ties between individual pay and the long-term success of the company and the repayment of TARP by the company could have the dangerous effect that Ally executives with no stake in TARP repayment would not work toward repayment but instead watch the Government sell Ally common stock into the market at further losses to taxpayers. In addition, by loosening restrictions on pay, OSM could be sending the message that the much-needed reforms coming out of the financial crisis are no longer necessary or required in exchange for Federal dollars. In 2009, the President announced restraints on pay at TARP companies as reforms, stating: “so that when firms seek new federal dollars, we won’t find them up to the same old tricks.” By getting further and further away from the President’s announced reforms and Treasury’s own guidelines, our nation may find the firms up to their same old tricks. OSM’s position that there is nothing requiring it to follow the President’s announcement misses the point because the President was announcing reforms designed to combat one of the material causes of the financial crisis. OSM’s own guidelines were created as reforms because leading up to the crisis, corporate officials at TARP companies were paid with high guaranteed cash salaries with “no skin in the game.” OSM’s guideline under former Special Master Feinberg that cash salaries generally not exceed $500,000 was about giving an employee “skin in the game.” Feinberg also used a significant amount of pay in the form of long-term restricted stock to “join at the hip” the individual and corporation, through individual performance focused on extended corporate growth over at least three years, not just short-term corporate success. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 41 Weakening restrictions on executive compensation could have the very dangerous effect of not providing employees enough skin in the game, and could tip the balance toward excessive risk. In 2013, OSM tripled the number of corporate officials paid guaranteed cash salaries over $500,000 in 2009, and put almost everyone else just under that cash threshold. OSM accelerated by one year the prior time restriction for corporate officials to cash out corporate stock received as pay from 2009 to 2014, effectively guaranteeing more cash pay and reducing an employee’s skin in the game even further. OSM gave a tiny (effectively 5%) portion of pay to Ally employees in long-term restricted stock in 2013 tied to long-term corporate success and TARP repayment, only to remove it entirely in 2014. Eroding reforms coming out of the financial crisis could have the dangerous effect of allowing companies to end up in the same place that required reforms in the first place. Finally, should this nation face the possibility of a future bailout, strong limitations on executive compensation on this still-existing TARP bailout could have a deterrent effect on companies asking the Government for Federal dollars. No one employee, no matter how valuable to his or her company, is important enough to risk weakening a deterrent to future bailouts. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 42 Recommendations According to the Government Accountability Office’s Standards for Internal Control in the Federal Government, commonly referred to as the green book, internal control is an integral component of an entity’s management that provides reasonable assurance that the objectives of an entity are being achieved. Moreover, the green book states internal control, which comprises among other things, policies and procedures, helps management achieve desired results through effective stewardship of public resources. As discussed throughout this report, OSM’s lack of robust policies, procedures, and guidelines have contributed to why OSM continues to approve excessive compensation and why OSM continues to make exceptions to its own guidelines. More robust policies and procedures would help ensure OSM’s determinations are not excessive and will help OSM to reject company requests for excessive compensation. Specifically, SIGTARP recommends: 1. The Secretary of the Treasury should require OSM to maintain documentation of the substance of all OSM communications with TARP companies. 2. The Secretary of the Treasury should require all Treasury employees to maintain documentation of all communications with TARP companies regarding compensation. 3. The Secretary of the Treasury should require OSM to maintain documentation of OSM’s communications with Treasury officials regarding compensation at TARP companies. 4. The Secretary of the Treasury should require OSM to use long-term restricted stock as part of each TARP company’s employee’s compensation package to ensure compensation is tied to both the employee’s and the company’s performance, and the full repayment of TARP funds. 5. The Secretary of the Treasury should direct OSM to conduct an analysis, independent of company proposals and assertions, for an employee of a TARP exceptional assistance company to be paid a cash salary exceeding $500,000. 6. The Secretary of the Treasury should direct OSM to document its independent analyses regarding the decision that a TARP exceptional assistance company employee be paid a cash salary exceeding $500,000. 7. The Secretary of the Treasury should direct OSM to conduct an analysis, independent of company proposals and assertions, for an employee of a TARP Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 43 exceptional assistance company to receive an increase in annual compensation. 8. The Secretary of the Treasury should direct OSM to document its independent analyses regarding the decision that a TARP exceptional assistance company employee will receive an increase in annual compensation. 9. The Secretary of the Treasury should direct OSM to conduct an analysis, independent of company proposals and assertions, for an employee of a TARP exceptional assistance company to be paid a cash salary that exceeds the market median cash salary for similar positions in similar companies. 10. The Secretary of the Treasury should direct OSM to document its independent analyses regarding the decision that a TARP exceptional assistance company employee be paid a cash salary exceeding market medians. 11. The Secretary of the Treasury should direct OSM to include in its written procedures whether it will target, for each Top 25 employee of a TARP exceptional assistance company, median total compensation for similar positions in similar companies. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 44 Management Comments and SIGTARP’s Response Treasury provided an official written response to a draft of this report in a letter dated September 21, 2014, which is produced in full in Appendix I. Overall, Treasury disagrees with the draft report, as it has with our two previous reports. While Treasury’s letter states our report contains inaccuracies and omissions, we believe OSM disagrees with our conclusions. Treasury has not clearly agreed to implement any of the report’s recommendations, which were intended to improve the program. SIGTARP considered and addressed OSM’s comments in the report as necessary and appropriate. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 45 Appendix A – Objective, Scope, and Methodology SIGTARP performed this evaluation under the authority of Public Law 110-343, as amended, which also incorporates the duties and responsibilities of inspectors general under the Inspector General Act of 1978, as amended. SIGTARP evaluated the Special Master’s decisions on executive compensation at Ally and GM, the two companies remaining in TARP that had received exceptional financial assistance. Our specific objective was to evaluate the 2013 pay packages proposed by Ally and GM and the decisions made by Treasury for compensation of the Top 25 at Ally and GM. The scope of the evaluation covered Ally’s and GM’s 2013 Top 25 compensation proposals and OSM-approved pay packages. The evaluation began in April 2013 and ended in September 2014 and was performed in Washington, D.C. To evaluate OSM’s decisions on the company-proposed pay packages of the Top 25 employees, SIGTARP interviewed OSM officials and reviewed the company proposals, OSM’s 2013 determinations and supporting documentation for 47 Ally and GM Top 25 employees. During the evaluation, OSM issued in April 2014 its 2014 pay determinations for the Top 25 employees at Ally. Although SIGTARP did not open the evaluation to cover all decisions made by OSM, where applicable it has referred to the public results. SIGTARP evaluated OSM’s decision making on pay and whether OSM implemented changes in response to SIGTARP’s earlier reports and recommendations. SIGTARP reviewed the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, TARP Standards for Compensation and Corporate Governance; Interim Final Rule, Congressional testimony, OSM’s June 2013 written policy, OSM’s June 2013 written procedures as well as OSM pay determination letters. SIGTARP also reviewed former Special Master Kenneth R. Feinberg’s discussion of his work at OSM in his book, Who Gets What. SIGTARP conducted this evaluation in accordance with the “Quality Standards for Inspection and Evaluation” established by the Council of the Inspectors General on Integrity and Efficiency. Those standards require that SIGTARP plan and perform the evaluation to obtain evidence sufficient to provide a reasonable basis for findings and conclusions based on the evaluation objectives. SIGTARP believes that the evidence obtained provides a reasonable basis for the findings and conclusions based on the evaluation objectives. Limitations on Data SIGTARP relied upon Treasury to identify and provide email communication and documents related to the executive compensation determination process. It is possible that the documentation provided by Treasury did not reflect a comprehensive response to SIGTARP’s documentation requests, potentially limiting SIGTARP’s review. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 46 Use of Computer-Processed Data SIGTARP did not use computer-processed data during this evaluation. SIGTARP obtained data from the company proposals received from Treasury and from determination memorandums available to the public on Treasury’s website. Internal Controls To assess internal controls over OSM’s determination process, SIGTARP interviewed OSM staff and requested OSM’s policies and procedures to determine the extent to which policies and procedures existed, and whether internal controls were reasonable and effective. Prior Coverage On January 28, 2013, SIGTARP issued evaluation report 13-001, “Treasury Continues Approving Excessive Pay for Top Executives at Bailed-Out Companies.” This report assesses OSM’s paysetting process for 2012 for the Top 25 employees of the remaining TARP exceptional assistance companies – AIG, GM, and Ally – in light of the findings and recommendations in SIGTARP’s previous report, issued January 23, 2012. On January 23, 2012, SIGTARP issued evaluation report 12-001, “The Special Master’s Determinations for Executive Compensation of Companies Receiving Exceptional Assistance Under TARP.” This report addresses the process OSM designed to set pay packages and OSM’s decisions on compensation for the Top 25 employees at the companies that received exceptional assistance under TARP. Under this evaluation, SIGTARP assessed the criteria used by OSM to evaluate and make determinations of each company’s executive compensation and whether OSM consistently applied criteria for the determinations made in 2009, 2010, and 2011. On October 14, 2009, SIGTARP issued audit report 10-002, “Extent of Federal Agencies’ Oversight of AIG Compensation Varied, and Important Challenges Remain.” This report addresses the extent of knowledge and oversight by Federal Reserve and Treasury officials over AIG compensation programs and, specifically, payments to retain employees in the AIG Financial Products (“AIGFP”) unit. The report also addresses the extent to which executive compensation restrictions or preexisting contractual obligations governed AIGFP retention payments, the outstanding AIG compensation issues requiring resolution, and Government actions to address them. On August 19, 2009, SIGTARP issued audit report 09-003, “Despite Evolving Rules On Executive Compensation, SIGTARP Survey Provides Insights on Compliance.” This report addresses the efforts of TARP recipients to comply with executive compensation restrictions and plans to comply with subsequently enacted changes in requirements. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 47 Appendix B – Treasury 2013 Pay Determinations for Ally EXHIBIT I COVERED EMPLOYEES 2013 Compensation Company Name: Ally Financial Inc. Employee ID Cash Salary Stock Salary (Performance based: The stock vests at grant and is redeemable in three equal, annual $8,550,000 installments $1,480,000 beginning on the first $4,068,621 anniversary of grant.)$1,975,900 Long-Term Restricted Stock (Performance based: Awarded based on achievement of objective performance goals. Generally $950,000 vests after three years of $220,000 service. Transferability $518,736 dependent on $274,100 TARP repayment.) Total Direct Compensat ion (Cash salary + stock salary + long-term restricted $9,500,000 stock.) 280677 $0 101512 $500,000 $2,200,000 102645 $600,000 $5,187,357 104428 $491,000 $2,741,000 105336 $500,000 $1,525,000 $225,000 $2,250,000 141296 $491,000 $1,673,930 $240,548 $2,405,478 159613 $421,008 $1,157,741 $175,416 $1,754,165 197253 $500,000 $2,778,650 $364,294 $3,642,944 265967 $600,000 $3,358,103 $439,789 $4,397,892 339212 $600,000 $400,000 $0 $1,000,000 353403 $416,000 $1,398,400 $201,600 $2,016,000 380289 $391,000 $1,310,900 $189,100 $1,891,000 391076 $500,000 $1,840,000 $260,000 $2,600,000 398005 $450,000 $1,233,000 $187,000 $1,870,000 513416 $491,000 $1,597,900 $232,100 $2,321,000 542135 $250,000 $2,270,000 $280,000 $2,800,000 546145 $591,000 $3,000,900 $399,100 $3,991,000 567303 $500,000 $2,020,000 $280,000 $2,800,000 673894 $490,988 $1,120,912 $179,100 $1,791,000 682168 $600,000 $4,462,345 $562,483 $5,624,828 707713 $550,000 $2,150,000 $300,000 $3,000,000 725547 $500,000 $2,020,000 $280,000 $2,800,000 931656 $491,000 $1,768,786 $251,087 $2,510,873 Comparison of 2013 compensation to prior year compensation for the employees listed above • Overall: Overall cash decreased $5.0 million, or 31.3%, and total direct compensation decreased $18.8 million, or 20.8%. • The 16 employees remaining in the Top 25 from 2012: Cash salaries remained the same and total direct compensation decreased $6.5 million, or 10.2%, from 2012. (This comparison is to target total direct compensation for 2012.) • The seven employees new to the Top 25 in 2013: Cash compensation decreased $5.0 million, or 62.9%, and total direct compensation decreased $12.3 million, or 46.1%, from 2012. Note 1: The total number of Covered Employees may be fewer than 25 because of separations from service since January 1, 2013. Note 2: The amounts set forth in Exhibit I were to be effective January 1, 2013, except that the amounts in the “Long-Term Restricted Stock” column were to be effective pro rata as of July 1, 2013, and prior to that date were to be delivered as stock salary. Redemption of stock salary awarded to the CEO will be as described above. Redemption of stock salary awarded to other Covered Employees will be in three installments as described in the Determination Memorandum. In addition, prior to July 1, 2013, the amount indicated in the stock salary column for employee 339212 was to be paid at an annualized rate of $1.4 million. Source: Treasury. 2013 approved pay determination for the Top 25 executives at Ally as of April 26, 2013. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 48 Appendix C – Treasury 2013 Pay Determinations for GM EXHIBIT I COVERED EMPLOYEES 2013 Compensation Company Name: General Motors Company 4859 $1,700,000 0094 $950,000 0230 $495,000 1223 $495,000 Stock Salary (Performance based: The stock vests at grant and is redeemable in three equal, annual $7,300,000 installments $1,187,500 beginning on the first $840,000 anniversary $626,000 of grant.) 1565 $495,000 $660,000 $525,000 $1,680,000 2346 $485,000 $845,000 $500,000 $1,830,000 2387 $495,000 $835,000 $600,000 $1,930,000 2986 $750,000 $3,960,000 $0 $4,710,000 3178 $460,000 $618,000 $450,000 $1,528,000 3199 $500,000 $600,000 $500,000 $1,600,000 3348 $650,000 $1,525,000 $0 $2,175,000 3774 $485,000 $1,015,000 $200,000 $1,700,000 4894 $495,000 $2,730,000 $0 $3,225,000 5021 $600,000 $4,250,000 $1,000,000 $5,850,000 5046 $475,000 $480,000 $320,000 $1,275,000 5555 $750,000 $2,840,000 $1,750,000 $5,340,000 5697 $750,000 $2,410,000 $1,550,000 $4,710,000 6386 $490,000 $1,137,000 $0 $1,627,000 6524 $495,000 $700,000 $555,000 $1,750,000 7459 $750,000 $2,825,000 $1,750,000 $5,325,000 7537 $600,000 $1,400,000 $1,000,000 $3,000,000 9074 $425,000 $312,500 $325,000 $1,062,500 9635 $500,000 $1,150,000 $750,000 $2,400,000 9859 $525,000 $545,000 $475,000 $1,545,000 Employee ID Cash Salary Long-Term Restricted Stock (Performance based: Awarded based on achievement of objective performance goals. Generally $0 vests after three years of $1,000,000 service. Transferability $665,000 dependent on TARP $515,000 repayment.) Total Direct Compensation (Cash salary + stock salary + long-term restricted stock.) $9,000,000 $3,137,500 $2,000,000 $1,636,000 Comparison of 2013 compensation to prior year compensation for the employees listed above • Overall: Overall cash decreased $6.6 million, or 30.7%, and total direct compensation decreased $3.0 million, or 4.1%, from 2012. • The 14 employees remaining in the Top 25 from 2012: Cash salaries remained the same and total direct compensation increased $3.0 million, or 6.1%, from 2012. (This comparison is to target total direct compensation for 2012; the amount of long-term restricted stock actually awarded may have been lower than the target amount.) • The 10 employees new to the Top 25 in 2013: Cash compensation decreased $6.6 million, or 57.0%, and total direct compensation decreased $6.0 million, or 26.1%, from 2012. Note 1: The total number of Covered Employees may be fewer than 25 because of separations from service since April 1, 2013. Source: Treasury. 2013 approved pay determination for the Top 25 executives at GM as of April 26, 2013. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 49 Appendix D – Treasury 2014 Pay Determinations for Ally EXHIBIT I COVERED EMPLOYEES 2014 Compensation Company Name: Ally Financial Inc. Employee ID Cash Sala ry Stock Salary (Performance based: The stock vests at grant and is redeemable in three equal, annual installments beginning on the $9,500,000 first anniversary $1,700,000 of grant.) Long-Term Restricted Stock (Performance based: Awarded based on achievement of objective performance goals. Generally vests after three years of service. Transferability dependent on TARP repayment.) Total Direct Compensation (Cash salary + stock salary + long-term restricted stock.) 280677 $0 $0 $9,500,000 101512 $500,000 $0 $2,200,000 102645 $600,000 $0 $5,187,357 $4,587,357 105336 $500,000 $0 $2,250,000 $1,750,000 129881 $400,000 $0 $1,441,000 $1,041,000 141296 $491,000 $0 $2,405,478 $1,914,478 159613 $491,000 $0 $2,341,000 $1,850,000 178067 $450,000 $0 $1,366,000 $916,000 197253 $500,000 $0 $3,642,944 $3,142,944 265967 $600,000 $0 $4,397,892 $3,797,892 305789 $491,000 $0 $1,791,000 $1,300,000 353403 $416,000 $0 $2,016,000 $1,600,000 354392 $500,000 $0 $2,174,943 $1,674,943 380289 $391,000 $0 $1,891,000 $1,500,000 391076 $500,000 $0 $2,600,000 $2,100,000 398005 $450,000 $0 $1,870,000 $1,420,000 491397 $391,000 $0 $1,441,000 $1,050,000 513416 $491,000 $0 $2,321,000 $1,830,000 546145 $591,000 $0 $3,991,000 $3,400,000 567303 $500,000 $0 $2,800,000 $2,300,000 673894 $490,988 $0 $1,791,000 $1,300,012 725547 $500,000 $0 $2,800,000 $2,300,000 921597 $500,000 $0 $2,149,872 $1,649,872 931656 $491,000 $0 $2,510,873 $2,019,873 .Comparison of 2014 compensation to prior year compensation for the employees listed above • Overall: Overall cash decreased $3.8 million or 25.2% and total direct compensation decreased $3.3 million or 4.7%. • The 18 executives remaining in the top 25 from 2013: Cash salaries remained the same and total direct compensation increased $150,000 or 0.27% from 2013. (This comparison is to target total direct compensation for 2013.) • The six executives new to the top 25 in 2013: Cash compensation decreased $3.8 million or 58.1% and total direct compensation decreased $3.4 million or 24.8% from 2013. Note 1: The total number of Covered Employees may be less than 25 because of separations from service since January 1, 2014. Note 2: Redemption of stock salary awarded to the CEO will be as described above. Redemption of stock salary awarded to other Covered Employees will be in three installments as described in the Determination Memorandum. Source: Treasury. 2014 approved pay determination for the Top 25 executives at Ally as of April 2, 2014 Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 50 Appendix E – OSM-Approved Total Pay over Market Medians in 2013 OSM-APPROVED TOTAL PAY OVER MARKET MEDIANS IN 2013 Employee ID Number Company Name Market Median Total Pay in 2013 OSM-Approved Total Pay in 2013 Amount of OSMApproved Total Pay over the Median 682168 Ally $2,960,000 $5,624,828 $2,664,828 102645 Ally $3,455,000 $5,187,357 1,732,357 265967 Ally $2,672,000 $4,397,892 1,725,892 280677 Ally $8,152,000 $9,500,000 1,348,000 391076 Ally $1,381,000 $2,600,000 1,219,000 542135 Ally $1,616,000 $2,800,000 1,184,000 931656 Ally $1,338,000 $2,510,873 1,172,873 105336 Ally $1,096,000 $2,250,000 1,154,000 197253 Ally $2,505,000 $3,642,944 1,137,944 104428 Ally $1,616,000 $2,741,000 1,125,000 141296 Ally $1,381,000 $2,405,478 1,024,478 7537 GM $2,094,000 $3,000,000 906,000 101512 Ally $1,361,000 $2,200,000 839,000 2387 GM $1,189,000 $1,930,000 741,000 707713 Ally $2,271,000 $3,000,000 729,000 1565 GM $1,094,000 $1,680,000 586,000 380289 Ally $1,355,000 $1,891,000 536,000 513416 Ally $1,810,000 $2,321,000 511,000 6524 GM $1,353,000 $1,750,000 397,000 3774 GM $1,335,400 $1,700,000 364,600 3178 GM $1,195,000 $1,528,000 333,000 0230 GM $1,675,000 $2,000,000 325,000 1223 GM $1,327,600 $1,636,000 308,400 546145 Ally $3,765,000 $3,991,000 226,000 5046 GM $1,054,100 $1,275,000 220,900 353403 Ally $1,833,000 $2,016,000 183,000 9074 GM $932,000 $1,062,500 130,500 398005 Ally $1,833,000 $1,870,000 37,000 4894 GM $3,199,000 $3,225,000 26,000 0094 GM $3,119,800 $3,137,500 17,700 Total $22,905,472 Source: SIGTARP analysis of OSM’s 2013 determination memorandums and company proposals. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 51 Appendix F – Status on Each of SIGTARP’s Seven Recommendations SIGTARP’s Recommendation Status on Each of SIGTARP’s Recommendations 1. To ensure that the office of the Special Master for TARP Executive Compensation consistently grants exceptions to the $500,000 cash salary cap, the Office of the Special Master should substantiate each exception requested and whether the requests demonstrate or fail to demonstrate “good cause.” Not Implemented. While Treasury’s documentation of granting these cash salaries has improved in that it includes some additional information beyond the company’s assertions, that information is primarily market data that the company provides. The recommendation was not to document better, but instead to “substantiate,” which requires some criteria for granting exceptions as well as independent analysis beyond the company’s assertions. Treasury’s policy and procedures do not contain any criteria for approving cash salaries exceeding $500,000 or any discussion of any analysis by Treasury. Implemented. In 2012, Treasury began retaining records of the market data provided by the company and a description of how it validates the data. 2. The Office of the Special Master should better document its use of market data in its calculations. At a minimum, the Office of the Special Master should prospectively document which companies and employees are used as comparisons in its analysis of the 50th percentile of the market, and it should also maintain records and data so that the relationship between its determinations and benchmarks is clearly understood. 3. The Office of the Special Master should develop more robust policies, procedures, or guidelines to help ensure that its pay determination process and its decisions are evenhanded. These measures will improve transparency and help the Office of the Special Master consistently apply the Interim Final Rule principles of “appropriate allocation,” “performance-based compensation,” and “comparable structures and payments.” 4. Each year, Treasury should reevaluate total compensation for those employees at TARP exceptional assistance companies remaining in the Top 25 from the prior year, including determining whether to reduce total compensation. Report Number 14-001 Not Implemented. Although Treasury created a written policy and procedures in June 2013, OSM’s policy only contains Treasury’s Rule and language from the statute, all of which existed prior to OSM’s creation. Therefore, OSM has not created its own formal policies. OSM’s written procedures are merely a documentation of some of OSM’s existing practices and guidelines, but not others as contained in the pay determination letters, and were not a new development of robust policies, procedures, or guidelines. They do not establish meaningful criteria Treasury can follow for approving cash salaries exceeding $500,000, pay exceeding market medians, pay raises, or the use of long-term restricted stock. Not Implemented. Treasury’s new procedures state that OSM may reduce pay; however, OSM did not address any guidelines or criteria that it would consider in doing so. September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 5. To ensure that Treasury effectively applies guidelines aimed at curbing excessive pay and reducing risk taking, Treasury should develop policies, procedures, and criteria for approving pay in excess of Treasury guidelines. 6. Treasury should independently analyze whether good cause exists to award a Top 25 employee a pay raise or a cash salary over $500,000. To ensure that the Office of the Special Master has sufficient time to conduct this analysis, Treasury should allow OSM to work on setting Top 25 pay prior to OSM’s receiving the company pay proposals, which start the 60-day timeline. 7. To be consistent with Treasury’s Interim Final Rule that the portion of performance-based compensation compared to total compensation should be greater for positions that exercise higher levels of responsibility, Treasury should return to using long-term restricted stock for employees, particularly senior employees such as CEOs. Report Number 14-001 52 Not Implemented. Treasury has not established clear policies, procedures, and criteria for approving pay in excess of Treasury’s guidelines such as the 50th percentile, cash salaries greater than $500,000, or use of long-term restricted stock. Not Implemented. Treasury has not established criteria for awarding an employee a pay raise or a cash salary exceeding $500,000. Such criteria are important for independently analyzing the basis for awarding pay raises or cash salaries greater than $500,000 and ensuring consistency in decision making. Treasury’s documentation of its justification does not evidence independent analysis, but instead sets forth the company’s assertions and market data supplied by the company. Not Implemented. In 2013, Treasury allowed some GM employees not to have long-term restricted stock and effectively approved only 5% of all Ally employees’ pay in long-term restricted stock and failed to consider positions and levels of authority on an individual basis, as called for by Treasury’s Rule. In 2014, Treasury eliminated long-term restricted stock for Ally employees. September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 53 Appendix G – Acronyms and Abbreviations Acronym or Abbreviation Definition AIG AIGFP Ally American International Group, Inc. AIG Financial Products Ally Financial Inc. (formerly General Motors Acceptance Corporation, Inc.) Chrysler Holding LLC Chrysler Financial Services Americas LLC Consumer Price Index General Motors Corporation (name changed from Corporation to Company after bankruptcy in 2009) TARP Standards for Compensation and Corporate Governance; Interim Final Rule (also “Treasury’s Rule”) Office of the Special Master for TARP Executive Compensation American Recovery and Reinvestment Act of 2009 Office of the Special Inspector General for the Troubled Asset Relief Program Special Master for TARP Executive Compensation Troubled Asset Relief Program the five senior executive officers and the next 20 most highly compensated employees U.S. Department of the Treasury Chrysler Chrysler Financial CPI GM IFR OSM the Recovery Act SIGTARP Special Master TARP Top 25 Treasury Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 54 Appendix H – Evaluation Team Members This evaluation was conducted and the report was prepared under the direction of Bruce Gimbel, Deputy Special Inspector General for Audit and Evaluation, Office of the Special Inspector General for the Troubled Asset Relief Program. Staff members who conducted the evaluation and contributed to the report include Jenniffer Wilson, Craig Meklir, Vonda Batts, Brandon Crowder, Michelle Mang, Janice Turner, and Cynthia Broome. Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES 55 Appendix I – Management Comments Report Number 14-001 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES Report Number 14-001 56 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES Report Number 14-001 57 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES Report Number 14-001 58 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES Report Number 14-001 59 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES Report Number 14-001 60 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES Report Number 14-001 61 September 24, 2014 TREASURY SIGNIFICANTLY LOOSENED EXECUTIVE PAY LIMITS RESULTING IN EXCESSIVE PAY FOR TOP 25 EMPLOYEES AT GM AND ALLY (GMAC) WHEN THE COMPANIES WERE NOT REPAYING TARP IN FULL AND TAXPAYERS WERE SUFFERING BILLIONS OF DOLLARS IN LOSSES Report Number 14-001 62 September 24, 2014 SIGTARP Hotline If you are aware of fraud, waste, abuse, mismanagement, or misrepresentations associated with the Troubled Asset Relief Program, please contact the SIGTARP Hotline. By Online Form: www.SIGTARP.gov U U U U By Phone: Call toll free: (877) SIG-2009 By Fax: (202) 622-4559 By Mail: Hotline: Office of the Special Inspector General for the Troubled Asset Relief Program 1801 L Street., NW, 3rd Floor Washington, D.C. 20220 Press Inquiries If you have any inquiries, please contact our Press Office: Troy Gravitt Director of Communications Troy.Gravitt@treasury.gov 202-927-8940 Legislative Affairs For Congressional inquiries, please contact our Legislative Affairs Office: Joseph Cwiklinski Director of Legislative Affairs Joseph.Cwiklinski@treasury.gov 202-927-9159 Obtaining Copies of Testimony and Reports To obtain copies of testimony and reports, please log on to our website at www.SIGTARP.gov. U U
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