Slog on, oh say-on-payers. Slog on. Someday you may actually get your wish for shareholders to determine senior managers' pay, and that'll be fun. For now, it's a slog, as a Wall Street Journal story revealed, reporting that say-on-pay shareholder votes at Wall Street firms inexplicably lost ground in a year of all years when one might have expected them to gain. You do get a sense that shareholders -- and we're talking institutions -- are about as eager to dive into executive comp on Wall Street as George Bush is to make another visit to the Saudis to beg for oil.
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The fact is say-on-pay has been successfully lofted up as a Serious Issue in the continuing long march of governance. But particularly when it comes to Wall Street, it embodies some debilitating contradictions that rarely surface in discussions about it, usually with governance proponents. Pay is complex; and the underlying issue shaping it -- accountability -- is like a live bomb that keeps getting passed around.
Let's review the situation. Wall Street firms are large, complicated and engaged in a lot of speculative market activities, some of which are extremely arcane. In short, far more than the usual corporation, a Wall Street firm is a black box -- or close to it. Wall Street firms also ride along a moving frontier, with the earth caving in just behind them at all times. The question at a Wall Street firm, given all this, is always what's the next thing; because even as you ask it, the current thing is either being commoditized or collapsing. The folks inside Wall Street firms may know something about the present, but they get paid for the future, the next thing, or the thing after that. There are layers of uncertainty that radiate out until you get to some nice money manager, say in Boston, with two kids, a wagging dog and a minivan, and a feel for portfolio management, who is confronted with designing comp packages for this gang of speculative cowboys.
Ha. Never going to happen. And if it does, what long-term good will it produce except giving the governance gang an opportunity to declare another victory? The accountability issue is particularly murky. Let's consider a few rough-and-ready rules of comp. The greater the uncertainty, the greater the tendency is to pay up for a "magician" (which usually means someone who, like an "American Idol" winner, gets the most votes of an amorphous crowd at the moment, which on Wall Street is usually the wrong moment, today's moment that's aging as we speak). The more speculative the situation, the greater the uncertainty. The shorter the time horizon, the more money you will throw at a magician to guarantee a result. Wall Street firms are all about extreme uncertainty -- risk management is a fig leaf that's fallen off the statue -- with short time horizons. Our money manager can, in theory, always sell out his position, escaping from accountability. What will he be thinking as he sits there with his proxy ballot? If I really squeeze comp, not only might everyone leave -- magicians first -- but also I'll get blamed for it when everything goes terribly wrong. It might be a pipe dream, but I'd rather keep a distance and try to time when right is going wrong and get the hell out of Dodge. I got the gas-guzzling minivan to pay for.
And seared into our money manager's brain has to be a reality the governance crowd always ignores: Shareholders loved subprime to death until it blew up; all interests were aligned at the moment. At some primal level, they have to know that you live these things forward, not backwards, particularly on Wall Street. - Robert Teitelman
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