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Two Words Refute Bank of America's Claim That It Pays for Performance: Ken Lewis

A Bank of America (BAC) spokesman is in the papers today defending the company's pay practices:
"We are a pay-for-performance company. Any generalities about levels of salaries are inaccurate to the extent that we pay individuals based on their own performance, the performance of their unit and the performance of their company."
This isn't rewriting history so much as crossing it out with a big red marker. Let's rewind for a minute. And to make things easier let's ignore what B of A pays investment bankers, since they don't break it out by individual. That makes it hard to tell which folks arguably deserve a big bonus because of strong performance from those who did poorly but still got some bucks.

Instead let's look at former CEO Ken Lewis. That makes sense because until last month he was the boss, and obviously the chief executive's pay sets the tone for the rest of the organization.

Lewis took over as CEO in April of 2001. Over the following eight years, between 2002 and 2009, he got a total of nearly $61 million in restricted stock. I zero in on Lewis's stock-based comp, rather than his base or bonus pay (and excluding options), because that's the part that theoretically does the most to hitch his long-term financial rewards with those of rank-and-file shareholders. And that's B of A's main criterion for setting pay. We know this because the company says so in its 2009 proxy statement:

Our year-end compensation decisions over the last several years most clearly illustrate the direct linkage between our executive officers' pay and our company's performance.
Between April 25, 2001, when Lewis took over as chief executive, and Dec. 31, 2009, his last day at the helm, B of A shares fell 45 percent. Return on equity plunged from 14.4 percent to 2.2 percent. Annual net income over that period declined from $6.8 billion to, as of the third quarter of this year, $6.5 billion. Non-performing loans as a proportion of total loans rose from 1.4 percent to 4.2 percent.

I could go on -- the taxpayer bailout, the Merrill Lynch bonus fiasco, the thousands of B of A employees pitched over the side -- but you get the picture. Judged on just about every significant measure of financial performance, Lewis's tenure at B of A was a horror show.

As my cocktail-napkin analysis shows, there was in fact a linkage between Lewis's pay and B of A's performance -- an inversely proportional one. His main legacy is to have made a company that was already too big to fail even bigger (no small achievement, depending on your perspective).

In leaving the company Lewis stood to collect $53 million in retirement benefits, or $3.5 million in annual pension payouts for the rest of his life. Paying for performance is a swell idea -- good performance.