Manulife, the millions and moral hazard

Good heavens, Dominic D'Alessandro. Do you really want to do this?

Do you really want one of your final acts as Manulife Financial's MFC-T CEO to be accepting $15-million for five months of work? Now , with your stock price down nearly 70 per cent in 18 months? Now , when even some honest, God-fearing and blameless nobodies at your destroyed rival, AIG, are receiving death threats for taking bonuses a fraction as large? Now, with all the intemperate talk of hanging financial services executives from lampposts?

I know, I know: Manulife's problems are not even in the same stratosphere as AIG's. To even mention the two in the same sentence is wrong. Agreed.

It's just that something tells me you've misread the zeitgeist here, sir.

"I'm not given to self-serving gestures," Mr. D'Alessandro told The Globe this week, explaining why he has not joined the cavalcade of senior executives returning some of their pay.

The $15-million isn't for last year, though, but time served in 2009 before his retirement in May. The explanation is that Mr. D'Alessandro is being recognized for his work during 15 years as CEO - the Asia strategy, taking the company public, the John Hancock purchase in 2004, and so on. In giving the money, said chairwoman Gail Cook-Bennett, "the board was thinking of the positioning of the company after a 15-year run … [and]his contribution in the building of these franchises over that long period."

Lifetime achievement awards are not only for the Oscars, apparently.

But, but, but: Mr. D'Alessandro was also paid well for these things along the way. In 2000, Manulife's first full year as a public company, the board granted him a special $1-million bonus for "exceptional performance." In 2004, he got another special bonus, $3.4-million, for completing the Hancock deal, then a second one of $4.1-million for meeting post-merger cost savings.

The merger, which made Manulife a much larger company, also vaulted Mr. D'Alessandro into a new echelon of pay. Since then, he has never failed to make at least $13.2-million in a year, which is technically what he earned during the annus horribilis of 2008, when Manulife's stock fell so hard that it wiped out eight years' worth of gains for shareholders.

I say "technically" because most of that pay was in stock options or other kinds of share-based pay, and thus isn't worth anywhere near $13.2-million today. This is one of the key arguments for the $15-million: No other Manulife employee has paid such a large personal price for the meltdown. At the end of 2007, Mr. D'Alessandro could have exercised his stock options for a $100-million gain (before taxes). He didn't, and with the stock at $15, all of those options are now underwater.

The hundred mil? Vamoosed. Should Mr. D'Alessandro be punished for not being Eugene Melnyk and cashing in while the going was good? Clearly not. He was doing what the governance types always preach - riding with the shareholders, skin in the game, all that stuff.

But then, they preach it because it matters. The shareholders have suffered huge losses but there's no one to hand them a $15-million compensatory gift. They bet, they lost, too bad, so sad - that's the market. The only question is whether their losses are permanent or, as Mr. D'Alessandro believes, temporary.

The main reason Manulife's stock is down so much is that it's too exposed to the equity markets. It aggressively sold variable annuities and other products that guaranteed returns (and booked earnings from that, which in turn helped the executives meet bonus targets). When the market crashed, the company found itself with a $30-billion paper liability for paying those guarantees to customers.

But the equity market won't keep falling forever and, as it recovers, that liability should shrink significantly or vanish - and Manulife's stock should rocket ahead. Since March 9, the S&P/TSX composite index is up 16 per cent and Manulife is up 66 per cent.

But if that's a sign of things to come, Mr. D'Alessandro will be handsomely rewarded anyway. Those options will spring back into the money. His company stock, deferred and otherwise, will be worth tens of millions more.

And if it's not? If other problems emerge, or if the value of Manulife's business is somehow permanently harmed? That would puncture a hole in Ms. Cook-Bennett's logic, wouldn't it? But Mr. D'Alessandro would still be able to live a comfortable retirement with a $3-million annual pension. The amount is that high because Manulife gave him two years of pension service for every year in the job.

Despite the recent problems at his company, Mr. D'Alessandro did a lot of good in 15 years, not only at Manulife but in business. At times, he has been Bay Street's conscience. After the accounting scandals of 2001-02, he was one of the first big-name CEOs to call for changes to how companies account for stock options. He also warned of "the moral hazards presented by the enormous, some would say grotesque, compensation entitlements."

If he believed it then, maybe he ought to give up the $15-million now, and exit the right way.