Some welcome changes are
starting to emerge in how executives at Wall Street firms are compensated.
The top brass at Goldman Sachs, Merrill Lynch and other firms are pledging
not to take bonuses this year, and Morgan Stanley says it will start
reclaiming cash awards that were based on what turned out to be failed bets.
But those things don't go
far enough to rid the system of the excessive pay that put this industry at
the center of today's financial storm. That will come when all components of
compensation are significantly reduced as part of a rethinking of how risk
taking is rewarded.
"Everyone is dancing around
what really needs to happen," said compensation consultant James Reda. "The
bottom line is that they are getting too much money to begin with and that
has to come down."
Because so much pay at the
nation's banks and investment firms was based on the achievement of
short-term results, that meant employees from the CEO to junior traders were
more willing to take on larger risks in order to secure quick and lucrative
rewards by way of cash bonuses and stock awards.
Had they had to consider the
longer term, they might have been more resistant to rush into investments
like mortgage-backed securities that are at the core of today's crisis. The
plunging value of these investments have caused banks to falter and lending
to dry up.
Conditions have gotten so
severe on Wall Street that the government had to step in with a $700 billion
taxpayer-funded bailout, which is giving banks access to capital so that
they avoid a fate similar to now-bankrupt investment bank Lehman Bros.
"What's really different
about this mess is that virtually all the financial institutions were busted
by deliberate fleecing," said Gary Lutin, an investment banker who chairs a
group known as the Shareholder Forum that addresses compensation issues. "We
gave everyone running our economy short-term pump-and-dump stock incentives,
and they did exactly what we paid them to do."
But getting Wall Street to
alter its ways won't come easily, because these compensation practices are
decades in the making. They began when many firms were run as private
partnerships, which set compensation levels and distributed profits as they
That structure never changed
once they became publicly owned, and compensation only ballooned as
executives demanded that they get as much or more than competitors.
Today's damaging publicity
surrounding pay presents an opportunity for the boards of Wall Street firms
- and companies throughout the United States - to look hard at their pay
formulas. What they've come up with to date are baby steps toward change.
For instance, there have
been a string of recent announcements that the top banking-sector executives
wouldn't get any bonuses this year due to their companies' dismal
Morgan Stanley's John Mack
is among those not taking a bonus, and the compensation for the 14 members
of the firm's operating committee will be down an average of 75 percent this
year, according to a memo Mack sent to all of the firm's employees.
The firm also plans to tie
compensation for all employees eligible for bonuses more closely to
performance. That will include a new policy that will allow for "clawbacks."
These would let the company reclaim any bonus paid to an employee if his or
her actions led to "the need for a restatement of results, a significant
financial loss or other reputational harm," the memo said.
Compensation experts call
that a notable move, and hope that others on Wall Street follow suit. But
they also point out that much more needs to be done to directly deflate pay
over the long term.
Reda talks about how Wall
Street CEOs have typically wanted their cash bonuses to be five to six times
their salaries and their stock compensation to be valued at about eight
times their salaries. Those kind of expectations need to be brought way
down, he said.
Another route, suggests
compensation expert Alan Johnson, would be to prevent executives from
selling any of their stock holdings until at least two years after they've
left their companies, and require a longer time frame for stock options to
be exercised, like three to five years.
"If you have to keep most of
your money in stock and can't sell, then you might have to get something
done in order to get rich," Johnson said.
These kind of changes won't
come overnight, but those leading these companies would be smart to consider
them. They have to in order to prevent another financial crisis of this