Hmmm, maybe, finally, a good idea on how to curb the worst excesses of Wall Street pay.
Regulators at the Federal Deposit Insurance Corp. (FIDC), the Financial Times reports, are talking about linking the amount that banks have to pay into the fund that provides government insurance to bank depositors with risky pay policies at banks. The more that a pay structure encourages short-term risk taking—like that which led to and then deepened the U.S. mortgage and mortgage-backed securities bust—the more a bank would have to pay into the fund.
For example, a pay policy that gave big cash bonuses to bank executives on the basis of one-year performance targets would lead to a higher FDIC fee because that kind of policy rewards executives for taking short-term risks even if the long-term result (say, in two or three years) is a disastr. A pay policy that paid out bonuses in stock that vested over time might be deemed neutral to the bank’s FDIC fee payment—since it does at least make a bonus payout depend on the longer-term performance of the stock. And a pay policy with claw-back provisions that lets a bank take back bonuses if long-term performance falls below short-term results might get a discount on fees paid to the FDIC.
This idea would get around what strike me as the three main drawbacks of the excessive-pay rules that I’ve seen so far.
First, it would get around the greed problem. I’m as much in favor of punishing Wall Street greed as the next guy or gal, but I do recognize that there’s a problem in defining greed. One person’s greed is another person’s (especially if they work on Wall Street) justified compensation. You may say you know greed when you see it, but clearly Wall Street in particular and corporate boards in general don’t. And what counts as greed in your home town almost certainly doesn’t meet the definition as understood by most corporate boards.
Second, by focusing on the broad risk-encouraging score of a pay policy, the idea avoids the kind of micro-management that any greed-avoidance rule requires. If corporate boards can’t recognize greed, as you and I might define it, and if the “outside experts” they hire to advise them on compensation actually serve to justify outrageous compensation (for a hefty fee), then the only way to clamp down on greed is to set up a “Pay Czar” or a “Citizens board” to rule on every CEO and upper level executive pay package. Talk about a process that will slow hiring to a crawl and that’s likely to produce arbitrary and widely divergent results. No thanks.
Third, any greed-avoidance system focuses on individual pay packages—did CEO A get offered too much money—rather than on the damage that a company’s pay policy does to shareholders. By putting an easily reported figure on the effects of a company’s policy on FDIC fees and hence on corporate profits, this idea would give shareholders an easy to understand tool for judging corporate governance and the costs of poor governance.
The FDIC policy is in the early discussion stages, the Financial Times reports, but it is on the agenda for a Tuesday meeting of the FDIC board.
And we devolve into CEO’s suck and/or lucky…. Perhaps, like all things, there are good CEO’s (Jobs) and less than good CEO’s (Amgen guy). Just like there are Cramers and Jubaks in the financial commenting world. Perhap’s its our responsibilty to take advice from the “better” one??
Jim, any comment on Glass/Steagal??
Anyway,
I agree with IanClarke. I’ve met construction foremen who have the talent and the morals to be a good CEO. They just don’t get the opportunity. I don’t think America will be harmed overall by letting the current crop of banking executives take a walk.
Jim,
Great post. I like the idea. Thanks for bringing this to my attention just when I was losing faith in all government entities. How do we get this kind of information for ourselves?
Thanks again
@gividen:
Maybe the money will leave, which may be a serious problem, but the talent won’t, because there is not that much talent in most CEOs who climb up the ladder thanks to their ability in corporate politics.
Rather, if some fresh air comes in, we are likely to see more talent emerge (though corporate politics will still be there). In itself, this is not a guarantee for the better; but in the current general scenario, it may be worth trying.
Dont’ get me wrong: I do recognise that most CEOs are bright people – though bright and talented are different things. I just wonder how much of their brightness goes into doing their job well and serving their shareholders, and how much goes into climbing first and reaping oversized compensations later.
It’s human, but, if I am to judge by those few glimpses of large corporations that I’ve had first-hand, it’s also often economically inefficient: so why accept it?
But, following your competitive disadvantage worry, I easily agree that it would be much better if all developed countries would introduce such a regulation simultaneously: we could then happily let the “talent” go bring competitive advantage to banks in Zimbabwe.
This sounds like a good idea to me. No legislation would be necessary (thus largely undermining any lobbyist influence) since the FDIC already exists and this would be just a bureaucratic adjustment of the determination method for charges banks already have to pay into the insurance fund. I am so tired of hearing about how massive compensation is necessary to keep the “best” people. These guys are nothing but narcissists. There are plenty of people willing and able to fill their places at more reasonable pay rates. Shall we start to name some of the “best and the brightest”? Bernie Madoff, Bernie Ebbers, Ken (Kenny-boy) Lay, the Rigas brothers (Bernie and Bernie, wasn’t it?) — yep, all deserving of outlandish compensation.
This would put American banks at a competitive disadvantage. The talent and the money will leave.
@Hankztur Listen to what you are saying. The government should apply tax policy to steer business in the direction that is best for the country? Do you trust politicians to determine what is best? Look what they have done so far. Business, and the country, is best served by government getting the heck out of the way!
As far as risk, deposit banks and investment banks should once again be separated. “Too big to fail” should be put away and never used again. But remember, never let a crisis go to waste!
Tying the FDIC premium to portfolio risk is a great idea. There is another one that has been kicked around for a while, and that is the limiting of the directorships that corporate officers can hold to those companies which have no directors or officers on their own board of directors. That is, an officer of Corp A should not be a director of Corp B if any officers or directors of Corp B hold a directorship in Corp A. That should break up the gentlemen’s club whose motto is “If you give me a raise/bonus, I’ll give you one”.
I don’t think that will cause a dirth of director talent; there are plenty of bright, competent people whose do not hold directorships because they simply haven’t been asked to join the club. It should, in fact open the windows and let some fresh air in; don’t you wonder, sometimes, what the officers and directors of major corporations were thinking when they made some of the decisions they made? I think they were thinking about their reciprocal compensation arrangements, rather than the long-term health of their companies.
twoyrfixed
Ah, reflection is a wonderful thing. Responding to your posts force me to reread everything again and again. Your right, your mother should be able to get her money when she wants and her ability to do that is guaranteed by an insurance policy (FDIC).
HIT POST BEFORE I WAS DONE
Insurance premiums are based on risk, so, yes it makes sense that risky banks should pay higher premiums. Thanks for making me think.
twoyrfixed
Ah, reflection is a wonderful thing. Responding to your posts force me to reread everything again and again. Your right, your mother should be able to get her money when she wants and her ability to do that is garranted by an insurance policy (FDIC)
Hank,
I’m with ya Brother! But I’m not worried, as Mr. Jubak’s been pointing out all day, the cure for what ails us will be upon us soon enough.
As for fixing “too big to fail”, I’ve yet to see a plan that solves the problem going forward and still “saves” CitiAIGBofAetc. Inc. And us!
I’d like my Mom to be able to go to the bank and be able to withdraw her money if she so chooses, so yes, I’m a Capitaist hypocrite as well!
Isn’t Money now better than Money later?
Yeah, I know – its “wallst” in my name isn’t it!
I can hear the opponents scream:
– This is going to kill free enterprise spirit.
– This is going to discourage innovation.
– This is against everything America is for.
– Etc. Etc.
twoyrfixed,
You make a very good point. Apathy runs rampant in many areas.
As a capitalist I have a problem with too big to fail. Being exempt from failure leads to excess risk taking.
Restricting the executive pay is only going to drive the talent elsewhere. Only when the talent has no place to go will this type of system work. Back to my point that all businesses would need to be included.
I see the problem as systemic, politicians lining there pockets, politicians favoring the needs of a small group of their constituents rather than the country as a whole. Business that are only interested in profit at any cost and without regard for the customer. Regulators that couldn’t find a Madoff in a pile of bad checks. Well I guess I’ve just described people. But I digress. The government has the power to tax, by using that power wisely they can steer business in the direction that is best for the country. The same as a general steers an army. This approach doesn’t involve pay czars, it doesn’t involve the general population being to involve. Lord knows raising kids and trying to pay the mortgage doesn’t leave much time for due diligence.
Seems like a great idea, i share Skllstrm’s feelings that lobbyists will try to kill it though. The other benefit is that the FDIC could probably get more money off this risk=payment strategy, which is something it desperately needs.
This is the best idea I have heard so far. I am afraid, though, that the corporate lobbyists will do everything they can to kill it.
Hank,
I think we already have it. it’s called “investor due diligence”. Unfortunately(sp), too few people care about the pay structure difference between the CEO’s of Amgen vs. Apple for example. If more people were to pay attention, it’s pretty clear where the leaders of a company interests line up with investors, and where they don’t.
As for boards, as a CEO I can tell you one thing…. Any CEO is going to stack a board with “his” (or her) people. We, as investors just have to judge whether that’s a good or bad thing. As to Jims point, companies that are too big to fail should operate under a different, centrally planned system like what the FDIC proposes. It seems to me to be a good idea.
Why limit it to banks or wall street. Why not have a policy that rewards all businesses for having long term goals!