Wall Street Pay In The Age Of Obama

Ingo Walter,
02.05.09, 10:43 AM EST

If you have bonuses, why not 'maluses'?

The unprecedented public bailout of the major U.S.
financial firms has forced the executive compensation issue into the
open. The cat's out of the bag, and it won't go away anytime soon.
Having been forced to guarantee every liability in sight and take
equity stakes in most of the largest financial firms, taxpayers feel
politically empowered to have a say in what happens next, notably pay.

A
visibly angry President Obama has used the bully pulpit to turn up the
heat another notch or two by imposing a $500,000 compensation cap on
top executives of firms accepting government support, with any bonuses
to be paid in restricted stock that can be sold only after the
government aid has been repaid. And there's a predictable crackdown on
the supplicants' "frivolous" corporate expenditures and pressure for
increased shareholder influence on board-level compensation decisions
going forward.

Aligning management compensation as closely as possible to the
interests of shareholders has been debated for decades. It's a
fundamental governance issue in market-based economies. But where firms
are deemed "systemic" (too big or too interconnected to fail) the
compensation issue and alignment of incentives takes on a very
different order of importance. Compensation systems in these kinds of
firms must be aligned not only to shareholder value,
but also the containment of systemic risk. What is it about corporate
governance of financial firms--particularly in matters of
compensation--that could put the entire system at risk? Is there a
defensible role for regulation of compensation practices in such firms?
Can we ever again rely on market discipline and sensible corporate
governance practices in this highly competitive sector of the economy?
Two issues appear to stand out--compensation of senior management and
compensation of "high performance"--or prima donna--employees.

Top Management

Lots of attention has been focused in recent years on compensation
of senior management of financial firms--usually comprising the
chairman and/or chief executive officer, the chief financial officer,
the chief risk officer and perhaps the heads of major operating units,
often conjoined in the firm's executive committee. Senior management
remuneration packages are usually the responsibility of the
compensation committee of the board of directors in the U.S. (or the
supervisory board in many other countries). Presumably Lloyd
Blankfein's $60 million compensation for 2006 carefully calibrated how Goldman Sachs

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shareholders made out in 2006. But to the extent compensation packages
deviate materially from sustainable competitive performance of firms,
and therefore the long-term financial interests of their shareholders,
the overcompensation problem is the result of governance failures. The
severance packages of most senior managers fired so far as a result of
the financial crisis--those triggering the most public outrage--suggest
the extreme "agency costs" imposed on shareholders in the financial
industry. Here's a common question usually avoided in polite company:
"Would you rather manage a Wall Street firm or own shares in one?" You have two seconds to answer.

So
far, senior management and boards of shipwrecked U.S. financial firms
have not publicly accepted much responsibility for the disasters on
their watch, almost uniformly holding "unpredictable market turmoil"
responsible. Perhaps it's the American tendency to blame the other guy
when something bad happens. Perhaps it's the fear of accountability in
a highly litigious society. Who knows? Contrition is not part of our
vocabulary. In contrast, Swiss former senior managers of UBS

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not long ago publicly acknowledged that they were on the bridge of the
ship when it hit the iceberg and soon repaid or declined some $40
million in compensation. Unlike small countries like Switzerland, with
powerful social mores and long memories, disgraced U.S. senior managers
and board members can perhaps count on the camouflage of an impersonal
society and short memories. Anyway, tomorrow is another day.

Remediating problems of senior management compensation in

more...http://www.forbes.com/2009/02/05/obama-executive-compensation-opinions-contributors_0205_ingo_walter.html