The Hartford Financial Services Group has adjusted the compensation for two top executives, boosting their base salary but lowering their overall compensation opportunities to comply with new federal restrictions on financial institutions that receive government bailout funds.
Waterbury-based Webster Bank, which received $400 million in government aid late last year, has followed suit, reducing pay packages for its CEO as well as his top lieutenants.
These are the first examples of Connecticut bailout recipients being forced to adjust executive compensation.
The Hartford’s changes, which were approved by the board of directors Aug. 13, reduced by 28 percent the “annual targeted compensation opportunity” for Lizabeth Zlatkus, the company’s executive vice president and chief financial officer, and John Walters, president and chief operating officer of Hartford’s Life Operations.
Webster Bank CEO and Chairman James Smith will see his total compensation opportunity fall 32 percent from the year ago period.
Annual target compensation opportunities are what executives receive if they meet certain performance criteria during the year.
Debora Raymond, a spokeswoman for The Hartford, said a similar compensation structure will also be generally applied to the company’s 25 most highly paid executives.
“The new program effectively ties compensation to company performance over the longer term, and is designed in the spirit and intent of [the Capital Purchase Program],” Raymond said.
The Hartford accepted $3.4 billion in June from the Troubled Asset Relief Program, which the Treasury has used to invest money directly into the U.S. banks.
Webster Financial Corp., which reported a $300 million loss in the fourth quarter of 2008, received its TARP funds in November to cushion its capital reserves against deteriorating loans and other assets.
The Hartford and Webster Bank now must adhere to strict executive compensation guidelines set out by the Treasury Department and stimulus package legislation. The restrictions are designed to prevent compensation from encouraging excessive risk-taking and include eliminating certain bonuses and limiting long-term incentives to restricted stock awards to up to one-third of total compensation.
The restrictions come at a time when The Hartford is continuing its search to replace chairman and CEO Ramani Ayer , who will step down by the end of the year.
Raymond said the company believes it can still appropriately and competitively compensate and incentivize its top executives.
Under their restructured contracts, Zlatkus and Walters will receive a larger portion of total compensation in the form of restricted stock units, the value of which will depend on the performance of the company’s share price.
Effective Aug.16, Zlatkus and Walters will receive an annual base salary of $975,000, $1.2 million in TARP-compliant deferred stock units, and a long-term restricted stock unit award of $465,000.
The executives may not cash in the long-term restricted stock unless they remain employed at the company for at least two more years and until the TARP money is repaid.
In 2008, Zlatkus and Walters had a total target compensation opportunity of $4.5 million, which included a base salary of $825,000, an annual incentive target of $1 million and a long-term incentive target of $2.7 million.
Meanwhile, Smith’s 2009 annual salary will be $1.3 million, compared to $879,800 in 2008, with all of the increase paid in the bank’s stock.Smith’s long-term incentive payment will not exceed $922,233, compared to $1.5 million in 2008.
The bank’s board of director’s also modified compensation for Gerald P. Plush, senior executive vice president, chief financial officer and chief risk officer; Joseph J. Savage, executive vice president of commercial banking; and Jeffrey N. Brown, executive vice president and chief administrative officer.
Limitations on executive pay have been the source of intense controversy around the country. A recently released audit by the special inspector general for the Troubled Asset Relief Program said that some bailed out banks have complained that compensation restrictions are too restrictive, causing top employees to leave the company.
Senior officials at two major banks, for example, said they have lost employees to foreign and domestic competitors who are not under TARP compensation restrictions. One of those banks said it had lost five executives to other firms as a direct result of compensation restrictions.
Other banks reported they were having trouble recruiting new employees or were experiencing higher levels of early retirements.
The audit also said that some bailout recipients were worried about the changing compensation guidance and rules since the program was signed into law last October. Since then, rules have been added or amended at least three or four times.
Paul Dorf, managing director of Compensation Resources, an executive compensation consulting firm in New Jersey, said the rule changes have made it difficult for them to advise clients.
“Some of these new edicts are in violation of their own rules,” Dorf said.
Sandy Brown, a managing partner for Bracewell & Giuliani in Dallas, said he is not surprised some bailed out banks are losing top employees.
“If they can’t get bonuses from a company that received TARP money, then they will go somewhere else,” Brown said.
