Compensation is the sacred cow of capitalism.
Is a juiced ballplayer worth $30 million a year? Just ask A-Rod or Shaq.
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Our right to get paid what we think we’re worth is sewn into the fabric of the American Dream. If you are successful in convincing your employer or board of directors to pay you what you demand, more power to you.
But if you are a multimillion-dollar ballplayer or hoopster, you’d better keep smacking the balls out of the park or slamming monster dunks. Otherwise, you’ll start hearing the Bronx Cheer.
Bank execs are no different. If they perform by hitting their numbers, the amount they’re paid is inconsequential. If they don’t, the ride is over.
In the wake of the most serious financial crisis in a generation, the Obama administration now is considering sweeping changes to the way financial industry employees are compensated.
With the near collapse of the nation’s major banks and billions of dollars in taxpayer money shoring up their books, overpaid bank executives are everyone’s favorite villain. Critics of the industry question how any bank can justify paying any employee compensation equal to the budget of a small city when most need government assistance just to keep their doors open.
Choosing the Right Strategy
The Obama initiative, which is in its early stages, is an ambitious and likely controversial attempt to address this issue. Administration and regulatory officials are looking at various options, including using the Federal Reserve's supervisorial powers, the authority of the Securities and Exchange Commission and moral suasion.
Proponents of executive pay restraints are looking for a legislative way to tie compensation to the government’s duty to assure the financial health of the banks it regulates.
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Under the current regulatory scheme, the government has the authority to prevent a bank from making a particular investment based on a risk assessment calculus. If, in the opinion of the regulators, the planned outlay jeopardizes bank solvency or risks depositor security, they may step in to prevent the transaction.
As outrageous as many salaries became, most analysts agree that executive compensation only accounted for a fraction of bank capital. According to the advocates favoring a change in executive compensation rules, however, the problem is not the pay itself, but, rather, the structure of the incentive packages that must be scrutinized.
At the root of the current financial crisis was the implosion of the mortgage market. Mortgages, many of which were suspect, were packaged and resold by banks as securities.
Based on the incentive structure in place at most banks, every time there was a deal resulting in the sale of these mortgage-backed securities, a commission was paid. In the end, before the collapse, hundreds of millions of dollars were paid in commissions associated with these deals.
Is This a Cloudy Area?
Proponents of changes in executive pay contend that this structure encouraged and rewarded risky investment practices that led to the downfall of the industry.
Among ideas being discussed are Fed rules that would curtail a bank’s ability to pay employees in a way that would threaten the “safety and soundness” of the bank — such as paying loan officers for the volume of business they generate, not the quality.
In light of the collective national animus towards the financial industry, it’s not surprising that the President has turned his attention to this matter. But executive compensation is not an issue easily subject to legislative control.
The government may be able to reach into supervision of bank balance sheets to assure that depositors are protected and that taxpayer monies are used for the purposes for which they are intended. Dictating limits on executive salaries is a very different matter.
To vocal critics of the administration, the President’s attempt to curb executive pay is further evidence of the slow creep towards socialism. The real question is whether any credible lawmaker will be able to find a legal, constitutional or practical means to attack this issue. Nearly everyone familiar with this question says the answer is no.
We are a capitalist society. The market sets the rules on compensation, not the government.
Hey, if they are dumb enough to pay you what you’re asking, then it’s your right to have it, no matter how much it hurts the team.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
