John Thain’s M&A-linked pay cut sets good example

March 22, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

CIT has taken a late grip on John Thain’s pay. The $7 billion lender docked its departing chief executive’s 2015 bonus by 30 percent because he didn’t successfully integrate OneWest, the California bank CIT bought last year for $3.4 billion. It’s a rare and welcome financial penalty for poor M&A execution.

Thain didn’t get the management teams and cultures to mesh quickly enough, CIT said in a filing on March 18. The takeover only received regulatory approval towards the end of July but it was announced a year earlier, which should have given the CEO plenty of time to get his integration ducks in a row.

The knock contrasts with the treatment of executives at BB&T, another acquisitive bank. Its top five executives shared a $2.5 million bonus for consummating the $2.5 billion takeover of Susquehanna Bancshares last year and to “incentivize a successful integration.” Closing a deal is only the beginning. CIT’s approach, tying incentives to the actual achievement of the promised benefits of a merger, is the right one.

CIT’s directors haven’t always kept such a beady eye on pay. They were less disciplined, for example, about Thain’s retirement pot: in December, the company changed the rules on its definition of “retirement” to allow him to keep more of the stock he has been awarded that is only scheduled to vest after he leaves. That could much more than offset the dent in his bonus.

Even so, it looks as though the parameters CIT’s board set for Thain’s gave it sensible ways to help match his pay with performance, both quantitative and qualitative. The perils of too much focus on quantitative measures are clear from Valeant Pharmaceuticals. The once unstoppable acquisition machine’s accounting mess has brought a share-price collapse and management turmoil. The company suggested on Monday that aggressive targets may have been a contributing factor to what it called “improper revenue recognition.”

Even when a merger is sensible, making it work is a crucial part of the job for a company’s leaders. Others could usefully follow CIT’s example and ensure that deal execution factors into top executives’ pay.

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