Pay Czar Gets Tough Assignment: What to Do About $100 Million?

Kenneth Feinberg, the man with the enviable position of Pay Czar, has his work cut out for him. He is tasked with reviewing and approving the executive compensation packages that were crafted before, and in some cases during, the great banking sector blow-out of 2008. According to the WSJ, Mr. Feinberg is not allowed to rip up previously agreed-to legal agreements. He can reduce salaries to compensate for overly generous bonuses and reduce future earnings. Reducing future earnings will, of course, lead to "top producers" leaving their posts. If your contract says you are owed $10 million and you get paid $10 million today, but are told you'll get a big fat donut next year, why bother coming in to work tomorrow? I wonder, can the Pay Czar cut the salaries enough so that salaries go negative? Isn't that a handy way for the government to defer the cost of supporting these insolvent institutions?

Reports over the weekend about a Citi trader's $100 million pay package are bound to put pressure on Mr. Feinberg to make some "tough" decisions about pay. Believe it or not, Citigroup actually has a group that makes money. You've probably never heard of it because it is a "highly secretive" energy trading group named Phibro run out of a barn in Connecticut by a man named Andrew J. Hall. Apparently, Citigroup only likes to publicize its divisions that are bleeding cash. In any event, Mr. Hall is due $100 million in compensation according to his contract and Citi finds itself in a pickle. It's tough to dole out $100 million to one man when the rest of the firm is still losing money and on $45 billion worth of government life support without inciting the pitchforks again from the masses. Sure the guy made hundreds of millions of dollars for Citi and wasn't responsible for the banks losses, but who cares?

Once upon a time, before government intervention in the private sector, there was a very easy way to deal with busting employment contracts at suffering firms. It was called bankruptcy. Nobody got riled up over Enron employees getting fat paychecks after the firm imploded because the employees were screwed along with Enron's investors. So it seems preposterous that a discussion over whether anyone working at Citi should get $100 million is even taking place. If Mr. Hall was such a savvy trader, he should have negotiated his lucrative deal at a bank that would actually remain solvent. Winding up at Citi was just a poor bet from a man who is supposedly good at taking risk. If the group is really that savvy and capable of generating huge risk free profits, then Citi should just spin it off for billions of dollars and pay the government back. But handing over $100 million to one man seems out of the question. Mr. Feinberg should choose wisely.