The cuts U.S. pay czar Kenneth Feinberg is requiring for top executives of seven companies taking government bailout funds, and the Federal Reserve’s proposals to regulate bank compensation more aggressively, have several provisions that smack more of populism aimed at swaying public opinion than of governance improvement.
Cutting so severely the top cash compensation for top performers at affected banks ensures they won’t be able to compete for top talent. The seven bailout firms, and the 28 banks on which the Fed proposes to focus, are hardly the only companies in global finance that could use the talents of executives accomplished enough to deserve high salaries. Why work for Bank of America when Macquarie Bank or HSBC doesn’t cap the salaries of its most talented employees?
Restricting the top salaries at AIG’s financial-products unit to $200,000 is more egregious; it’s a punitive measure just this side of shutting down the department, which would be the more humane thing to do if Feinberg wants to starve it of top talent.
Tying more of compensation to long-term performance is uncontroversial; anyone who has worked at a company in which decisions are determined primarily by that quarter’s financial results will agree. But isn’t the far greater part of most executives’ compensation already based on long-term pay such as options, shares and pension plans? To pick an executive not entirely at random, recently departed Bank of America CEO Ken Lewis earned $24.8 million in 2007. Of the total, $1.5 million was salary, while $11 million came from stock awards, $4.6 million from options, $4.3 million from non-equity incentive plan comp, and $3.2 million from change in pension value and non-qualified deferred comp. How are Feinberg and the Fed going to improve on that ratio?
Finally, the creation of incentives for companies to return government cash is understandable – the government has written so many IOUs, it should probably collect payment in the cases where it’s the creditor. However, it’s an incentive that doesn’t meet the goal of reducing risk-taking. It sounds here as though Feinberg is creating a different set of circumstances under which bank executives can ignore the long-term health of their companies for their own short-term benefit.