Illusory gains land corporate USA in hot water

While none of the top executives at AIB subsidiary Allfirst was fired over the trading debacle, all were denied an annual performance bonus for 2001, when currency trader Mr John Rusnak lost $373 million (€425 million) of the $691.2 million of the bank's money he gambled away.

Last year, however, the bank's compensation committee awarded the five most senior Allfirst officials a total of $1.262 million in bonuses for their performance in the year 2000, according to documents filed with the US Securities and Exchange Commission (SEC).

Mr Frank Bramble, chairman and highest-paid executive, received a $435,000 bonus on top of his $725,000 salary and Ms Susan Keating, president and chief executive, $336,000 on top of a $600,000 salary.

These bonuses were paid on the basis of profits made by Allfirst in 2000. However, in that year Mr Rusnak lost $211 million, which means those profits were wildly overstated.

Bonuses were paid to Allfirst executives for three of the five years during which Mr Rusnak was accumulating total losses of $691.2 million and for which earnings have since been revised. In 1998, no bonuses were paid because of the bank's poor overall performance.

Allfirst executives also received options to enhance their compensation. Mr Bramble, who is to be paid a lump sum of $2.9 million instead of a pension when he retires in June, had considerable "exercised" and "unexercised" options at the end of last year, according to the SEC filing.

During 2001, Ms Keating was granted 190,000 share options at the exercise price of $21.65 with an expiry date of 2011 and potential realisable value of $2.6 million at an assumed annual stock price appreciation of 5 per cent.

These options would, of course, be worthless if the share value dropped below $21.65 (they are currently $23.90).

The question of bonus payments to executives at both Allfirst and AIB for the year 2000 is likely to be raised by investors at AIB's annual general meeting in Dublin later this month.

There was no suggestion of impropriety on the part of the top Allfirst executives nor any deliberate manipulation of numbers to overstate earnings, though the internal Ludwig report portrayed a bank rife with lax management and inadequate controls.

The Allfirst case, however, raises interesting questions about what companies and executives should be obliged to do about performance-related bonuses paid on the basis of an overstatement of earnings - whether by default or design.

There have been several instances in recent years in the United States where executives were required to repay bonuses to settle accounting scandals. The SEC filed suit last year for example against Mr John Brincat, former chief executive of Mercury Finance in Chicago, over inflated earnings and bonus payments in the mid-1990s, and four executives at T2 Medical in Georgia were fined $500,000 by the SEC for taking performance bonuses and engaging in insider trading.

THE recent high-profile scandals concerning now-bankrupt corporations Enron and Global Crossing have prompted the SEC to seek new ways to force executives to repay bonuses and other compensation tied to inflated or fraudulent earnings growth.

At Enron, executives raked in tens of millions of dollars from stock-option gains on the basis of phoney figures that showed spectacular growth. Global Crossing executives gained more than $1 billion from stock sales in the past two years as the company was going down the tubes.

SEC chairman Mr Harvey Pitt told securities lawyers recently that the regulatory agency would try to recoup money for investors in cases where executives reaped the benefits of "illusory" gains, but do not "suffer the consequences of subsequent restatements, the way the public does". Mr Pitt said he was concerned about a corporate culture in which executives were rewarded for short-term performance and not for enhancing the long-term fundamental value of a company. Executives, he suggested, should be able to cash in options only after company results were sustained.

In recent years there has been a rash of cases where corporate officials issued inaccurate earnings statements which pushed the stock price up, and then cashed in their stock options before correcting the figures. Many household name corporations are acknowledging "errors". Xerox last week restated earnings back to 1997 and agreed to pay a $10 million fine for inaccurate accounting.

Investor watchdog groups have protested that linking executive compensation to earnings growth has provided too great an incentive to manipulate figures, which is a serious offence, or to disregard warning signals as long as the numbers looked good. The case is gaining ground for executives to return some of the compensation received when companies stumble through mismanagement.

"Even if they were unaware, they should take a hit," said Mr Nell Minow, editor of Corporate Library, a research website focusing on corporate governance. "The buck stops there. That's their job."