Bank of New York Mellon Corp. CEO Robert Kelly has said he opposes the new government limit on Troubled Asset Relief Program recipients issuing bonuses. His reason? Senior executives, he said, ultimately will be more likely to quit and work for overseas banks, boutiques or private equity firms.
Kelly said the pay and bonus caps will bring about "unintended
consequences" and throw off the playing field. (Perhap's he's worried
about passive-aggressive behavior as well? Check out Banker's Ball.)
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The provision, which Sen. Chris Dodd, D-Conn., inserted into the stimulus bill, restricts bonuses for top earners at firms that have received TARP funds from the U.S. Treasury. The limits are in lieu of proposed executive pay caps of $500,000 announced by
the Obama administration. Under the Dodd provisions, executive bonuses must be limited to as much as 50% of an executive's salary.
In a way BoNY Mellon's Kelly is right because it does limit incentives for bankers at
the top firms, and there are opportunities for abuses. For example, bankers may clamor for larger salaries in order to increase their bonuses. Currently, annual salary is a small part of a Wall Streeter's total compensation, so bonuses are often many times larger than salaries. And while bonuses are often performance-based, salaries aren't, so firms may increase salaries, but receive little performance increase.
Of course in the current recession, the Dodd bonus restrictions may not matter as many bankers at the moment simply are trying to figure
out if they are keeping their jobs. And even if they do jump ship to foreign firms, which are not covered by the restrictions, they may be in for a rude awakening as Credit Suisse Group, Barclays plc and UBS are cutting compensation anyway. Below are 2008 bonus cuts at European banks as posted on Reuters:
- Barclays: a 48% fall across the bank and 50% at the investment banking arm
- Credit Suisse: a decrease of 60%, with managing directors getting no unrestricted cash
- Royal Bank of Scotland Group plc: a reduction of 90% in cash bonuses with exceptions in deferred payments that could equal a 60% drop in total bonus
- UBS: a drop of more than 80% for its investment
bank
Face it. It's not just Wall Street's bonuses that have been slashed. Overall,
everyone is taking a bonus cut for the time being, but when the economy recovers, the warning by BoNY Mellon's Kelly may seem prophetic.
- Maria Woehr
Comments
Kelly is way behind the knowledge curve as to where the financial industry is heading, which is much smaller and more efficient to business. What Kelly fails to realize is that the skills that most Ivy trained bankers have not relevant in the post bubble environment.
The last hand has been played and while bubbles will happen again, there won't be another one soon enough for Mr. Kelly to worry about, he will be most likely at his island retreat by then, or perhaps even pushing up daisies with me, being a contemporary of his.
Banking will be a lot more boring and lower paying, with the much of the financial acumen hopefully migrating not to "boutiques" or UBS or any other absurd den of alchemy frequented by the "bankers" of today, but to factories and pharma that make things that are of value.