Saturday, January 31, 2009

The Insanity Of Executive Compensation Legislation

Will the Obama administration really try to limit executive compensation through legislation? I hope not.

Enacting laws that establish ceilings on pay packages are all the rage at the moment, supported by the public, politicans and shareholders. All seemingly for good cause.

Just try and explain to a single mother struggling to make ends meet or a guy holding down two jobs to keep his family together how someone like Stan O’Neal, the former CEO of Merrill Lynch, could walk away with a $250 million bonus after his firm declared an $8.4 billion write-down.

Or why, after record breaking losses, multibillion dollar taxpayer bailouts and the demise or failure of some of the Street’s most venerable firms, over $18 billion in bonuses, the sixth largest haul on record, were paid out in 2008.

It’s a tough sell

It’s hard for most people to understand how top executives who oversaw debilitating losses that hurt so many people, could be so lavishly rewarded.

Senator Claire McCaskill, an early supporter and close ally of Barack Obama, proposed a law yesterday that would prevent executives from companies who accept TARP money, from making over $400,000. The same number as the salary of the President of the United States.

And while the on-line community, numerous politicians and many in the media seem ready to jump on this populist bandwagon, you’ve got to wonder what the ramifications of such a law would bring.

The business of Wall Street is making money

Those who work in financial service careers are often most motivated by money. They’re not looking to cure cancer, provide socially redeeming services or make the world a better place. They’re in it to get rich ... plain and simple.

It’s not just the traders, brokers and deal-makers who are out to make big bucks. It’s anybody who works for those firms. HR, legal, IT, marketing and every other function you can name, are paid more at financial service firms than in virtually any other industry.

It’s been that way forever and most of that pay comes in the form of bonuses that augment relatively low base salaries.

While one can question and even denigrate their values, the truth is those people represent some of the best and brightest talent in the country. And when things are going well, nobody blinks an eye.

But now, as the housing market implodes, credit tightens and the ranks of the jobless grow daily, we as a people look for scapegoats and it’s not too hard to find them.

Legislating salary caps is not the answer

In spite of all the claims to the contrary, salary cap legislation will only succeed in driving the best performers, especially those in the mid-level executive ranks, into non-TARP taking hedge funds, investment banks, consulting firms and related companies. And it will cause other businesses that could use TARP monies to help their constituents think twice before lining up at the trough.

Plus, it will do nothing to reduce a culture of greed at those firms not dependent on TARP funds.

How then, can we solve the problem of unmerited levels of compensation, obscene bonuses and unrepentant risk taking?

It’s already started. Using the bully pulpit and shining a harsh spotlight on those outrageous and undeserving payouts has begun to drive compensation down at many firms and the trend will only continue. Just ask the executives at UBS.

Having the President declare these excesses “shameful” does not go unnoticed by Boards of Directors and Executive Compensation Committee members concerned about their image and the public’s mood.

Legislating executive compensation at TARP taking companies will only drive top performers from one firm to another whereas continued public outcry, media exposés and Presidential outrage puts pressure on all companies, TARP takers or not.

As far as I know, that's how a democracy works.


Anonymous said...

You have to be kidding. Please tell me that you are. The best and brightest? How much money did those geniuses lose? Even they cannot quantify.

They will get up and go? My wife has an expression for that....don't let the door hit them in the a*s.

Low base salarys? Yes many make more than the president even without the bonuses.we are not just talking CEOs and Boards.

When things go good no one even blinks an eye? Sure because they take the bad stuff off balance sheet and lie about the profits.

Anonymous said...

Great post, I am almost 100% in agreement with you



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