Congress Shines Spotlight on Exec Comp

A new investigation by Congress provides a rare glimpse into the workings of three top boardrooms in corporate America, raising serious questions about whether there is a widespread failure among executives and directors to live up to their fiduciary duties.

The report examines the compensation practices at Citigroup (C Quote), Merrill Lynch (MER Quote) and Countrywide Financial (CFC Quote), three companies that have become engulfed by massive losses related to the mortgage market.

Recent payments, stock purchases and retirement packages enjoyed by current and former CEOs at the three companies show a breakdown in corporate controls designed to protect the interests of shareholders.

On Friday, former Citigroup CEO Chuck Prince, ex-Merrill Lynch CEO Stanley O'Neal and Countrywide chief Angelo Mozilo will appear before the House Oversight Committee, chaired by U.S. Rep. Henry Waxman (D., Calif.), to answer questions raised by the report. Directors, including Time Warner(TWX Quote) Chairman Dick Parsons, who sits on the board at Citi, will also appear.

"Any alignment between the compensation of the CEOs and their shareholders' interests appears to break down in 2007," said the report, which was issued Thursday.

Despite precipitous declines in the performances of all three companies and their stock prices in 2007, all three chiefs were richly rewarded. Prince was awarded a $10 million bonus, $28 million in unvested stock and options and $1.5 million in annual perks upon his departure from Citi last year. O'Neal was allowed to leave Merrill Lynch with a $161 million retirement package. Mozilo received over $120 million in compensation and sales of Countrywide stock.

The companies defended the compensation awarded to Prince, O'Neal and Mozilo as fulfillment of contractual obligations that were put in place in an attempt by their employers to attract talent, years before the housing crisis struck, according to the report. They also argued that the pay packages aligned the executives' interests with those of shareholders.

While these cases are dramatic examples of a breakdown in corporate controls that are particularly outrageous, given each company's major role in the U.S. mortgage crisis, the report cites evidence that such runaway compensation packages are rampant throughout corporate America.

In 1980, CEOs in the U.S. were paid an average 40 times the average worker, according to the report. In 2006, the average Fortune 250 CEO was paid over 600 times the average worker. While CEO pay has soared, employees at the bottom of the pay scale have seen their real wages decline by more than 10% over the past decade.

Meanwhile, the report said, many experts believe there is a growing disconnect between CEO pay and performance. It cited a recent survey of more than 1,000 directors at large U.S. companies, in which 67% of the respondents said they believe boards are having difficulty controlling the size of CEO pay packages.

A Princely Sum, Stan the Man

When Prince left Citigroup last November, he was awarded performance bonuses of $10.4 million in cash and $28 million in unvested restricted stock and stock options.

"It is unclear how these decisions were related to Mr. Prince's performance or benefited Citigroup shareholders," said the report, which notes that Citigroup recorded more than $18 billion in writedowns related to subprime and other risky mortgages. Its stock dropped by 48%o from its five-year peak in December 2006. Neither O'Neal nor Mozilo received performance bonuses in 2007, amid similar performances at their companies.

After Prince left, Citigroup's board also gave him perks worth $1.5 million annually, which include an office, an administrative assistant and a car and driver for five years as well as a commitment to pay taxes on those benefits.

"Mr. Prince had no employment contract entitling him to these benefits upon his retirement from Citigroup," said the report.