It's not the size of the paychecks that's the problem. It's the way the compensation packages are structured. Dial down the cash, dial up the stock (and increase vesting and holding periods), and you'll promote long-term value creation by the people who work in finance.
That was the message on Thursday from the Fed, which said it will review compensation practices at the 28 largest financial firms, and also from Treasury pay czar Kenneth Feinberg. Although Feinberg restructured and reined in pay for top executives at seven bailed-out companies, he says he's agnostic on where the levels should be for the sector as a whole. "I wouldn't begin to say how much money you should make on Wall Street," he told
The New York Times.
But those seven- and eight-figure pay packages do matter. Not because the government should be trying to control them across the board, but because their proliferation over the last two decades actually signaled the deeper structural problems that current reform efforts fall short of addressing.
Here's the key question: Are Wall Streeters like cleanup hitters, who get giant paychecks because they hit home runs? Or are they more like the
Carnegie Hall stagehand who made $530,044 in fiscal 2008 because he and his peers enjoy a choke-hold on an important institution?
As financial industry comp breached the ionosphere, the folks receiving it naturally tended to believe the former, no matter where they worked. Even after seeing their companies rescued by the government, many don't seem to grasp that their ability to hit home runs -- especially in the past year -- has much to do with the privileged position their too-big-to-fail firms enjoy. In reality, the mega-earners at the TBTF banks have a lot in common with the members of the stage-hand union.
The people running these banks argue that they have to pay up for talent, and in the current system they surely do. But that argument takes for granted the notion that TBTF institutions should be making the kinds of bets that require them to compete with hedge funds and private equity firms for talent.
Former Fed Chairmen Paul Volcker and Alan Greenspan and Bank of England Gov. Mervyn King have a solution. All have spoken out in favor of breaking up the big banks, with Volcker and King even advocating a return to a Glass-Steagall-type separation of investment and commercial banking. The counterargument here isn't trivial, though. It's that these activities are too intertwined for separation to be practical, especially when we want the banks to get back to lending. And anyway, the banks will fight it tooth and nail.
Which pretty much explains why we're going down the current path. Perhaps adjustments to pay structure (already in the works anyway at several big banks) will combine with higher capital requirements and other measures to push the industry toward a slower-motion reconfiguration. We can only hope. -
Kenneth Klee
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