This week marks the beginning of what is shaping up to be the greatest battle Wall Street has ever fought. Banks will submit pay packages to the Obama administration’s compensation czar, who will be charged with evaluating the pay packages.
No doubt some of them will have to be found to be excessive, if just to show that there are boundaries. We wouldn’t be surprised if banks purposefully up their numbers in anticipation of getting haircuts from the pay czar.
But underlying this entire process is an absurd idea: that a regulator can assess the appropriateness of an employees compensation. What criteria could a regulator possibly use to make this evaluation? How can appropriateness be calculated from the outside? What metric can a regulator use to decide if the pay package encourages risky actions by executives?
This weekend New York Times columnist Gretchen Morgenson raised exactly this point:
Perhaps the most troubling aspect of the House bill, however, is its reliance on regulators to recognise and rein in compensation practices that encourage risky actions by executives at financial services companies. Under the bill, federal regulators would write new rules to prevent “inappropriate or imprudently risky compensation practices” that could threaten the safety and soundness of major financial institutions.
It’s hard to believe that regulators are savvy enough about both pay packages and risky compensation incentives at financial companies to recognise when either or both have become dysfunctional. Remember, these are the same regulators who allowed brokerage firms to increase their leverage to wildly high levels, who helped break down investor protections put in place during the Great Depression, who let big banks balloon their balance sheets with poisonous assets and who were unable to spot the decades-long fraud of Bernie Madoff.
That’s some track record. How do you think they will do when it comes to pay? A much better fix would be to hold compensation committees and directors themselves accountable for pay policies and responsible for discouraging reckless managerial practices.
“They are focusing on the symptoms rather than on the basic issues, like the way they allowed people to go unregulated,” Mr. Foley said, referring to the House bill. “Not that there shouldn’t be a price extracted. But my concern is they are focusing on the wrong end of the mule.”
This is not surprising, of course. Regulators rarely own up to their failures. It’s far easier to lay the blame elsewhere.
Sometimes we forget that somewhere beneath her shareholder democracy banner, there lurks a little libertarian in the heart of Gretchen Morgenson.
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