Do as I say, not as I did: Part 1, what I say
When we catch someone saying one thing and doing another, the juxtaposition is too much fun to resist – as in this case where the government, with full righteousness, said one thing only weeks after having done the exact opposite.
The huge banking institution is giving their new CFO compensation worth as much as $5.5 million. That includes an almost $2 million cash signing bonus and a generous salary that could top $2.3 million.
Catastrophe being a precondition to fundamental financial reform, in the aftermath of the banking crisis and the massive multi-billion-dollar Federal intervention, government is pursuing both the continuing crusade to choose culprits and then excoriate them, and also to put in place a new more expansive post-Paulson regulatory structure that will reduce systemic risk in the US and global banking systems.
A spokeswoman justified the pay because it was comparable to what others in the financial services industry make.
“A foolish consistency of the hobgoblin of small minds.”
Both objectives are ostensibly served by Washington’s new announcements of dramatically intrusive rules governing executive pay, as reported in the October 23 Wall Street Journal (quotes in blue Times Roman):
In a one-two punch at the pay culture of banks and Wall Street firms blamed for the financial crisis –
Take that,
So now it’s the pay culture? One single villain?
You mean there’s another?
To be sure, compensation structures shape and reflect corporate culture and played a contributing role in this epic mess, but to demonize a handful of executives is to exculpate everyone else – and we were all greedy, all starving for yield, and all short-sighted. The entire world got drunk on risk, and we all have the mother of all hangovers.
And we’re not happy about it, are we?
– the
Retribution and correction often intermingle. From the parent who shouts this hurts me more than it’ll hurt you to our schizophrenic attitude toward incarceration – is it supposed to be punishment, or penitence? – human beings who have been hurt want those who hurt them to feel a measure of pain.
While the moves had been anticipated for weeks, Thursday’s separate announcements by the Federal Reserve and Treasury Department represent unprecedented federal intervention in pay decisions traditionally left to boards and shareholders.
In our post-crunch regulatory structure, are we trying:
1. To align incentives?
2. To cut executive pay?
These are not the same thing, and to do the latter in the guise of the former will only lead to tears.
The central bank moved to incorporate reviews of compensation into its routine regulatory process, a step that will affect large and small financial firms across the
That’s a good idea; transparency and periodic scorekeeping are helpful.
The crackdown –
Notice the inflammatory language of vengeance.
– is likely to influence how financial firms pay top executives, traders, loan officers and others whose actions could threaten the soundness of the institutions.
Another implicit confusion. Government has no business preventing companies from taking risks, but it does have a legitimate business in preventing companies from taking risks that threaten the financial system. Americans are rightly angry that, in protecting the American economy, the regulators have rescued banks from themselves.
As expected, Treasury official Kenneth Feinberg said cash salaries paid to the highest-earning executives at seven companies getting exceptional federal aid will be capped at $500,000, while the group’s total pay level, annualized, will be 50% lower than a year before.
Mr. Feinberg, I note, has no background whatsoever in finance; he’s a lawyer, a prosecutor, and a mediator. All these are very odd credentials for his current role.
Judging by his pictures, Mr. Feinberg is fond of shaking his finger
If these are such good ideas, why aren’t the shareholders doing it themselves? Why rely on Uncle Sugar to do it?
The rulings cover the highest-paid 25 employees at each of the seven heavily aided companies: Citigroup Inc., Bank of America Corp., American International Group Inc., General Motors Co., GMAC Inc., Chrysler Group LLC and Chrysler Financial.
Are the regulators pandering to the populist mob, or are they doing something that cannot be done except by an external and disinterested agency?
Standards are meaningful only when applied to all. Individual entities competing with one another – whether companies for market share, or companies for executives, or even individual executives – cannot be expected to renounce potential comparative advantage.
“I think it will make an important difference” because many banks have been reluctant to change their pay practices unilaterally out of competitive worries, said
How big a difference? This big
Mr. Neiman’s got it exactly right. It does no good to take a stand on principle for lower athlete pay if others are profligate.
We bleed Yankee blue … or Steinbrenner green
Indeed, the inevitability effect practically guarantees people will try to steal a march on their competitors, once they know new rulemaking is certain.
Compensation experts said it would be hard for companies to escape the new oversight, though individuals could do so by jumping to hedge funds, private-equity funds and other financial firms beyond the reach of the new curbs.
Exactly. If compensation is regulated at a defined group of institutions, the most highly compensated will simply jump to new unregulated institutions.
You have to pay me to try this
Many years ago, I was negotiating guarantees from a developer whose integrity I doubted. (One does this now and then in business.) To assure that I didn’t have the company’s net worth lost in the shell game, I insisted on having the parent company on the guarantees, not a single-purpose subsidiary. I thought myself clever – except that shortly thereafter, the developer formed a new parent company, of which the one signing our guarantees then became a subsidiary. Over the ensuing years, the sponsor ran al the income through the new parent, thus gradually atrophying my guarantor.
Out of that, I learned a lesson – if you want to squelch a behavior, you have to squelch every possible outlet. In regulatory terms, if you want to cap pay across the board, then you must regulate it everywhere:
Some state regulators said they plan to issue similar requirements for state-regulated banks not covered by the Fed plan.
The rulings will be effective for just November and December; employees won’t have to repay salaries already received.
That’s a sound principle – aside from the impracticality and legal liability associated with attempting to claw back payments legally made under binding contracts.
But the rulings will become the starting point for next year’s salary figures and until the companies repay their government aid.
It sounds like you’re capping 25, but you’re capping everybody.
These moves are the brainchild of Kenneth Feinberg, the Treasury Department’s special master for compensation.
“Stop pointing out that I point my finger a lot.”
Mr. Feinberg is taking seriously his moniker of czar; he is willing to command with laserlike precision:
Don’t come to my attention
Mr. Feinberg said he will have to approve pay for the next chief executive at Bank of America. He already pushed outgoing CEO Kenneth Lewis into giving back $1 million he received so far this year and forgoing the rest of his $1.5 million salary for 2009.
While I have no sympathy whatsoever for Mr. Lewis, that certainly sounds like schoolyard bullying of no conceivable economic or public-policy benefit. It’s retribution, pure and simple.
And I did so well for B of A, too
Some critics said that Mr. Feinberg was too soft on the banks and that his main accomplishment – forcing firms to use more stock and less cash when paying employees – didn’t go far enough to rein in compensation.
He’s using a blunt instrument to get their attention. Being blunt, it won’t necessarily work well.
You dare say this doesn’t work?
While the Fed didn’t propose pay caps, it said it will review compensation policies at “28 large, complex banking organizations,” which it didn’t identify. It will be a “horizontal review” that in effect compares them to one another.
Making this so funny is that scarcely weeks earlier, the government itself violated every single Feinbergian principle when it hired a new CFO for an entity entirely under its control. As reported Business Week (quotes in red Arial):
When [the new CFO] joins Freddie Mac on Oct. 12, he will receive a base salary of $675,000 and is entitled to an additional $1.66 million in cash for the year. The company said he will be paid in installments, but did not specify the timing of those payments in a Sept. 24 securities filing. The company declined to comment beyond the filing.
He will also receive performance-based pay at the board’s discretion. The target amount for that cash compensation is $1.16 million, but what is actually given to Kari could be higher or lower.
His cash signing bonus totals $1.95 million and will be paid out in semi-monthly installments over the year.
Feinberg says cap cash pay at $500,000, his fellow agency approves paying $1,950,000 as a signing bonus.
The Federal Housing Finance Agency, which oversees Freddie Mac, approved the pay package.
Can we reconcile this seeming contradiction?
“Don’t try to contradict me”
[Continued tomorrow in Part 2.]
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