Banker pay under fire
The
FT
reports on
its front page that the investment-banking industry is proposing new pay
guidelines for itself in a bid to head off political pressure to reform
how compensation gave bankers the incentive to take huge risks that held
out the possibility of big payoffs for themselves with little downside for
their pay.
The
Institute of International Finance is considering proposals to defer
bonuses until the long-term impact of bankers’ moves are clear, or to
force bankers who lose money in their individual business units to make up
the shortfall before they get any more bonuses. You know, like almost
everyone else has to do.
The issue of banking pay is becoming particularly controversial because
salaries in the financial industry have exploded this decade relative to
other sectors of the economy. However, some sectors with the biggest
pay-outs in recent years—such as complex credit—are in the storm of the
current credit turmoil. Meanwhile, the banks are still paying high
bonuses to many employees, in spite of a swath of writedowns.
This is triggering growing criticism of compensation structures among
policymakers and some investors. “At present, compensation incentives
are asymmetric…This encourages employees to take excessive risks,” says
Philipp Hildebrand, vice-chairman of the Swiss National Bank.
The pay
issue is an essential one that will be increasingly important and visible
as the credit crisis unwinds over the next months and years. The incentive
structures are gamed for short-term gains to the long-term detriment of
their companies and to the economy.
Wamu
to Street: Drop dead
Incredibly, the board of Washington Mutual is going the opposite way on
the pay issue, the WSJ
says on A3.
It will exclude many of the effects of the credit crisis from its bonus
calculations, something the paper says “effectively shields the pay of
chairman and chief executive of the thrift, Kerry Killinger, and more than
100 other executives from the continuing mortgage fallout.” This from a
bank that has been one of the hardest hit by the credit and housing busts,
with shares down more than 70 percent from early last year.
Unsurprisingly, WaMu investors are ticked:
“They’ve cost their shareholders a lot of money,” said David Dreman,
chairman of Dreman Value Management LLC, which holds 27.9 million WaMu
shares. “Bonuses should be given to the executives who enhance
shareholder value, not destroy it.”
Apparently it was just too much that poor WaMu execs had their bonuses cut
in half last year. That banking-industry plan to make bankers earn back
their losses before raking in windfall bonuses looks even better than it
did two minutes ago, huh?